Headline: Network Associates: Acquires Magic Solutions-Reaffirms 1Q/2Q
Author: Michael E. Stanek
Network Associates acquired Magic Solutions, a developer of internal help desk software in a cash transaction valued at $110 million. Deal is expected to be non-dilutive and close in 2Q. NETA will take a one-time charge in excess of $90 million in 2Q. The acquisition gives NETA the #2 market share in help desk software behind Remedy (RMDY-NR; 20 7/16), and #2 on Windows NT. Management also gave comfort with 1Q/2Q estimates, citing healthy demand, and larger deal sizes across all segments of the organization. Believe acquisition another in series that will make NETA premier network management and security company for the NT platform. Reiterate 1-Buy and $90 price target. ________________________________________________________________________
The Magic Solutions acquisition gives NETA the #2 market share behind Remedy (RMDY-NR; 20 7/16), and #1 on Windows NT. NETA will add Apr. 200 employees, including a large sales and consulting organization. The revenue mix is approximately 65/35 product vs. consulting with the average deal size for Magic about $35,000 vs. $100,000 for NETA's Service Desk, giving NETA a presence in the low-end segment of the market. Magic currently has about 5,000 customers. Magic expects to ship an upgrade to its core product (SupportMagic 4.0) in 3Q/4Q (16 bit to 32-bit) which NETA will fully support and integrate into its existing ServiceDesk suite.
Management Reiterates comfort with 1Q consensus estimates of $0.54: Management cited healthy demand across all product segments, including help-desk, security, and network visibility. Noteworthy was the fact that the company is seeing larger deal sizes-a direct result of its suite strategy. The Network General integration appears on track, with sales integration, commission schedules, and pricing completed early in 1Q.
Bottom Line: Network Associates continues to deliver on stated objectives. The company is proving its ability to integrate both small and large acquisitions to build for the future, while not impacting short-term performance. While we acknowledge acquisitions can have unexpected consequences, we are confident in management's ability to integrate another acquisition given its track record. Network Associates appetite appears insatiable for acquisitions that extend and broaden their product base in network security and management and we expect the company to do more.
NETA remains the single best way to play NT networks outside of Microsoft. The company's billion dollar run rate combined with a track record for earnings consistency should continue to drive the multiple to the 30-35x range. We maintain our 12-month price target of $90 per share.
BUSINESS DESCRIPTION: Network Associates is a leading developer of network security and management software.
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