Perhaps it's fatigue with the options scandal that has now spread to more than 100 technology companies. Perhaps it's confidence in McAfee's bench players like Dale Fuller and Eric Brown, just named acting chief executive and chief operating officer, respectively. Or perhaps it's relief that security software provider McAfee (MFE) moved quickly to hold execs responsible this time, as opposed to past scandals the company has faced. For some analysts, it's just speculation that the company will sell itself rather than recruit fresh leadership.
Whatever the reason, when McAfee announced that Chief Executive George Samenuk was resigning and President Kevin Weiss had been fired for presiding over McAfee during a time when the company engaged in the backdating of stock options, investors took some comfort in the moves. The company's stock rose 3.3%, to $26.64, on the news. This on the same day that CNET (CNET) announced that CEO Shelby Bonnie would resign in the midst of an options backdating probe, sending that company's stock tumbling 7.7%, to $9.14.
BAD TIMING. And although investors may appreciate having some resolution in a scandal that has hung over the company since an internal investigation uncovered the options issues in July, it's hardly a good time for McAfee to be leaderless, even if the company is interested in selling to the highest bidder.
The security software company is No. 2 to Symantec (SYMC) in the security business, despite recent gains in some product lines. And it's facing a big competitive threat from Microsoft (MSFT), made worse by Microsoft's decisions to make its own security center the default on the new Vista operating system, and to deny anyone access to the guts of the new operating system, known as the kernel. The latter is a big concern to both Symantec and McAfee, who say they need such technical access to enable newer and more efficient software to protect PCs from more sophisticated Internet-related threats.
In fact, just a week before his departure, Samenuk picked an open fight with Microsoft, posting an ad in the Financial Times that called the Redmond giant out for anticompetitive behavior that would make everyone using the Internet less safe. "When it hurts the consumer, we feel we have to bring this issue forward" he said Oct. 2 in an interview with BusinessWeek.com. Whether the company is really worried about the safety of the Net or just protecting its own revenues has been debated, but it's clearly a big issue for McAfee either way, and the company just lost its spokesman (see BusinessWeek.com, 10/3/06, "McAfee and Symantec Confront Microsoft").
UPS AND DOWNS. There are also the intangibles that Samenuk represented to McAfee. When he came on board six years ago, the software maker had stumbled badly and was reeling from yet another scandal over questionable boom-time accounting practices. It had also made some big strategic gaffes. Chief among them was spinning off its consumer business under the brand McAfee.com and renaming the rest of the company Network Associates. Executives at the company have faulted that move for allowing Symantec to surpass McAfee by a wide margin in the lucrative consumer market (see BusinessWeek.com, 5/31/05, "McAfee Isn't Insecure Anymore").
Samenuk and his staff made smart changes fast. They cut head count by more than 1,000 people, divested acquisitions that hadn't worked as planned, and bought back the consumer division, renaming the whole company McAfee. Investors applauded loudly, with the stock appreciating some 70% during his tenure, although recently it had lost ground, posting a new 52-week low of $19.82 on Aug. 10 of this year (see BusinessWeek.com, 8/11/06, "McAfee: No Protection from Bears").
Still, the company has been cited for its scrappy strategy of partnering with Internet service providers to get a bigger foothold in the consumer business. These ISPs frequently give McAfee's antivirus and firewall software away for free, hurting profits. But the renewal rates are higher, boosting overall market share and revenues. Many analysts felt it was one of the first times in a long time Symantec felt any pressure from the much smaller No. 2.
UNCLEAR FUTURE. Each of these moves took gutsy leadership. Now as growth in security software slows and Microsoft gears up for attack, McAfee will need strong leadership more than ever. That's particularly true as the company squares off against Symantec, led by CEO John Thompson, who has proven himself willing to fight Wall Street investors—and anyone else—to scrape out a competitive advantage.
Perhaps, as analysts Sarah Friar of Goldman Sachs Group (GS) and Sterling Auty of JPMorgan Chase (JPM) suggested in research notes, the move is a precursor to a McAfee acquisition. That would be a shame for the security market, and mark a true maturing of the sector, as McAfee was the last big player to focus solely on security software. Microsoft isn't a company known for innovation, and Symantec is becoming less of one as it grows larger and splits its focus from strict Internet security products. As McAfee's future becomes less secure, consumers hope their computers won't follow suit.
Lacy is a reporter for BusinessWeek.com in Silicon Valley
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