When Bill Larson, CEO of security software specialist McAfee, announced in October 1997 that his company was to acquire lumbering network fault analysis software firm Network General, his message to investors was characteristically unequivocal. Clearly, size does matter in most things in life, he said, adding that the deal would give the newly-formed company, Network Associates, the scale to address the wider demands of enterprise security. But despite his forceful tack, Larson failed to convince everyone, most notably Wall Street. In the aftermath of the merger announcement, investment bank Goldman Sachs downgraded McAfee stock, and the company’s share price fell 10%. The bankers feared that McAfee was paying far too much for a company which, while a third larger than itself, was considerably less dynamic. But in late January, when Network Associates reported the newly- pooled revenues for the closing three months of 1997, it easily beat Wall Street expectations. For the fourth quarter, the company reported a loss of $80.9m. But excluding the non- recurring charges relating to the acquisitions of Network General and encryption software specialist Pretty Good Privacy, the company would have posted profits of $36.1m. This is a jump of 26% over the net profit in the corresponding 1996 period. At the same time, revenues for the period were up 39% at $173.3m, compared with $124.7m a year earlier. Zach Nelson, general manager of Network Associates, concedes that McAfee and Network General had very different corporate cultures. McAfee, he says, was a young, entrepreneurial company which was experiencing a compound revenue growth rate of 116% over three years. Network General, in contrast, was older, more established, with revenue growth over three years of a more sedate 28%. He denies, however, that the difference in pace of the two companies has impeded the assimilation process, saying many of the sales staff who had worked for Network General have told him how pleased they are with the change of both drive and atmosphere the merger has inspired. However, the combination has also meant cutting jobs: 150 were axed in December from Network Associates’ 1,700 employees. The product lines of each company were also quite different. McAfee started out in 1989 selling desktop anti-virus software on a shareware basis. But CEO Larson knew the virus paranoia could never be the sole basis of a major software company. So McAfee embarked on a rapid-fire round of acquisitions, including LAN tools vendor, Saber, in 1995, and network security software firm, FSA, in 1996. The Network General acquisition takes that process a step further with a range of ‘sniffers’ that route out network faults and related performance and security management problems a natural extension of McAfee’s focus on network management, says Nelson. He denies that integration of the two company’s diverse product lines may prove a problem. The products are hugely complementary, he says, adding that just two months down the line from the merger, Network Associates has already rolled out its future product strategy to the newly-grouped salesforce. Now, Network Associates must prove Wall Street’s skepticism wrong, by showing the underlying truth in Larson’s assertions of the importance of size. The security software business is extremely competitive, but is largely made up of small, specialist vendors. Many companies do not want to entrust their core corporate assets to a very small niche player. We needed to grow, insists Nelson. However, Network Associates has yet to prove it can craft a tightly integrated security suite that incorporates software from McAfee, Network General, and Pretty Good Privacy. According to the company, work is currently underway to integrate products from all three divisions into suites, but is still in its early stages. Nelson points to his company’s history of acquisitions as proof that Network Associates will ultimately succeed. However, the Network General acquisition is by far his company’s largest purchase. Christiansen believes that although the deal represents a significant challenge, the forceful, focused style that has characterized McAfee means Network Associates is well equipped to assimilate new lines and people with greater ease than other companies.
This article originally appeared in Global Technology Business.
