Weekly Review: SEC Saves McAfee from Parent

When you've recently been valued at close to $2 billion, the prospect of losing your independence in return for little more than $200 million is bound to seem unappealing. That's the situation that McAfee.com found itself in last week, when 76 percent stakeholder Network Associates made an offer, valued at $208 million, to buy back the outstanding shares in McAfee that it does not already own.

It's never easy to stand up to a parent, but yesterday (March 25th), McAfee announced that it had decided to reject the offer (see McAfee Turns Down $208M Buyout Offer. Both parties were saved the embarrassment of any further public squabbling by the unexpected intervention this morning of the Securities and Exchange Commission (SEC), though neither company will be happy about the involvement of the U.S. financial markets regulator. It has begun an investigation into Network Associates' accounting practices in fiscal year 2000. (See Network Associates' McAfee Bid Stung by SEC.)

Read and React

"Oracle's online applications division has been trapped inside a corporate mentality that will never allow it to find its true market, and that's exactly what would have happened to McAfee.com had it not miraculously been saved by the fortuitous intervention of the SEC. " Talk about the future of McAfee and Oracle renewed ASP focus in the ASPnews Discussion Forum

McAfee's rejection of the Network Associates offer was based on a belief that it undervalued the desktop anti-virus and security ASP, which Network Associates span out in a NASDAQ IPO in December 1999. It had offered 0.675 of its own shares for each outstanding McAfee.com share. At yesterday's closing price for Network Associates stock , that amounted to an offer of just under $17 per McAfee.com share, valuing the company as a whole at a shade less than $800 million.

Although that price was well within last week's $16-$18 ballpark for McAfee.com stock , it would have been a different story three months ago. At its January 8th high of $42.50, McAfee.com's market capitalization just clipped the $2 billion mark. So when McAfee described its parent's offer yesterday as "opportunistically timed," what it meant was that Network Associates had chosen to launch its bid at a moment when McAfee.com's share price was uncharacteristically weak compared to Network Associates.

Independence Day for McAfee
Today's announcement is likely to redress that balance, as the shadow of SEC investigation for accounting irregularities falls over Network Associates. The last time questions were being asked about its fiscal probity, its share price hit a low of less than $5 (adjusted for splits), and actually fell below the price of McAfee.com stock.

More importantly, the aborted buyback bid relieves McAfee.com's management of the need to fight for the company's continued independence. The startup has done a remarkably good job of building up a large customer base and a profitable business in its short lifetime. It's unlikely it could have done that had it remained a division of its parent. I've written previously, in the context of NetLedger, about the importance of pioneering new technology-based business models outside the influence of big-company hierarchies (see Oracle, NetLedger Execute Textbook Deal).

Although a fall-off in subscriber growth was one of the factors in McAfee's share price plunge since the beginning of the year, this is likely to have been more a reflection of temporary market conditions than a fundamental flaw in the company's business model. But the continued overhang of Network Associates' majority stake and the question of what impact that will have on the company's future direction remains an unhelpful source of uncertainty.

One of the greatest worries is that McAfee will ultimately be swallowed back inside Network Associates, where it will be nigh on impossible to resist the overwhelming pressure to conform to conventional software vendor patterns of behavior.

Case in Point: Oracle
You only have to look at the progress of Oracle's in-house ASP unit to see what I mean. Despite the strong commitment of CEO Larry Ellison to the model and the undoubted passion of the division's president Timothy Chou, it still makes only around $50 million in sales from just 200 customers.

Now the division that began life as Oracle Business OnLine and was later rebranded as Oracle.com has been repositioned under yet another new name. Its target is the same as it has always been, however. It is charged with winning over 25 percent of Oracle's customers to the ASP model by 2006 — that's a sales target of 2,800 more than it currently serves.

This is all very well, and it will be helped by adding Oracle's database and application server platforms into its portfolio alongside the applications that it already offers. But it will not be helped by its new name, which demonstrates how little Oracle really gets what is going on. The division is now called Oracle E-Business Suite Outsourcing, which is about as far removed from a radical new way of delivering software functionality as you can get.

Maybe Oracle thinks this name will be successful because it does not threaten the settled notions of its customers and the salesforce who sells to them on its behalf. But anyone who thinks the ASP model is all about outsourcing conventional applications just hasn't been paying attention for the past three years. You either do it with a completely new approach to delivering software functionality, or you fail.

McAfee Saved from Oracle-like Fate
McAfee.com, cut free from its parent and allowed to follow its instincts, has understood that and been successful so far. So, for that matter, has NetLedger. But Oracle's online applications division has been trapped inside a corporate mentality that will never allow it to find its true market, and that's exactly what would have happened to McAfee.com had it not miraculously been saved by the fortuitous intervention of the SEC.

Tools:

Add aspnews.com to your favorites Add aspnews.com to your browser search box IE 7 | Firefox 2.0 | Firefox 1.5.x

Back to Analyst Columns