There are few things I hate more than public speaking. One of those things is losing money. Losses in Symantec led me to the Symantec Analyst Day in San Francisco in order to try and nudge Symantec management to return more cash to shareholders. I believe shares of Symantec are grossly undervalued and that the solution to this undervaluation is quite simple.
Symantec trades at six times free cash flow. If Symantec directs all its free cash flow to share repurchases there will either be no more shares left in 6 years or the stock will be much higher. The latter is far more likely. Its simple math. In the past decade Symantec has spent $20 billion on acquisitions. The current enterprise value of Symantec is $9.5 billion. Assuming no value for the preceding company the market believes that Symantec destroyed $10.5 billion in capital.
The environment at the analyst day was very pleasant. All the analysts and company management knew each other. There was a continental breakfast, refreshments and gift boxes. The questions by analysts were mostly softballs as analysts need to maintain their access to management. Given this environment it was doubly hard to speak publicly because my question stood out. I tried to ask my question in as polite a manner as possible but the CFO danced around my question so I had to follow up in a more direct manner. The recording and transcript of my question and answer follow: ( I recommend reading the transcript rather than the YouTube video. The British accent makes the CFO's response sound convincing. But reading the words makes it obvious that my questions were largely ignored)
Analyst: Tsachy Mishal
Question – Tsachy Mishal: Tsachy Mishal, TAM Capital Management. At a 17% free cash flow yield, how can any acquisition stand up to that test? It's a business that you know and you can get a 17% after-tax return. Why not put even more money into the share repurchase?
Answer – James A. Beer: Yeah.
Question – Tsachy Mishal: And secondly, while I believe a share repurchase is better (than a dividend) you can still commit to shareholders by saying we'll return $5 billion over the next three years. It doesn't necessarily have to be a dividend, but why not a commitment versus just saying we're repurchasing aggressively, which could stop tomorrow?
Answer – James A. Beer: Well, so let me address a few themes there. First of all, I do think it is important to continue to have a balance between the use of capital in terms of returning it back to shareholders and using it on acquisitions that will allow us to accelerate our strategy, get time to market faster, and that will drive additional cash flow generation streams out into time. Again, we've got good opportunities, we're right in the middle of very good markets, but they're evolving relatively quickly.
And it's important that we make the right moves in terms of M&A in a disciplined way, sensible prices, real focus on integration. And so we'll continue to have that type of perspective, and I think that will be important to driving those top line type projections that I offered, that will drive the sort of cash flow generation, that will drive the present value, that will drive stockholder value.
Now in terms of the buyback volume and so forth, last year we used an amount basically equal to the generation of our U.S., of our onshore cash flow from operations. We deployed an amount equivalent to bring down our share count net 4.3%. That's a strong record, I would argue, by any measure. And further, I would argue that while I accept your notion that it can be turned off, I think you have to look at the history.
For the last six years that I've stood on this stage, we have consistently bought back a large volume of shares every year, through some of the most difficult macroeconomic climates that the country has faced in decades. And so I think we have built a consistent record that is illustrative of the seriousness of intent that we have in terms of returning shareholder value.
Question – Tsachy Mishal: Could I follow up...?
Answer – James A. Beer: Yeah.
Question – Tsachy Mishal: In the past decade, you've spent $20 billion on acquisitions, enterprise value is $9.5 billion. It's not working. Why do you think that that's suddenly going to change?
Answer – James A. Beer: Because we have strong market opportunities in front of us. We're very focused around the value that we put into acquisitions, and we're very focused on integrating to get the value out of those acquisitions. We back that up by reporting to you on what we expect each quarter coming from an acquisition, so you can very much hold us to account if you will in terms of our integration performance.