Network Associates Drops McAfee Bid, Stocks Hit

R. A. Hettinga rah at
Fri Apr 26 15:27:47 EDT 2002

April 25, 2002

Network Associates Drops McAfee Bid, Stocks Hit


Filed at 7:49 p.m. ET

NEW YORK (Reuters) - Computer security provider Network Associates Inc.
(NET.N) on Thursday withdrew its offer to buy Corp. (MCAF.O)
after it found accounting errors that could force it to restate financial
results for 1999 and 2000.

The news sent both companies' shares reeling. tumbled more than
24 percent, or $4.57, to close at $13.97 on the Nasdaq, where the stock was
among the top percentage and net loss leaders. Network Associates lost 20
percent, or $4.86, to close at $18.89 on the New York Stock Exchange, where
the stock was among the most active and biggest net losers.

Network Associates, whose accounting practices are under investigation by
the U.S. Securities and Exchange Commission, said it does not have a
``complete understanding'' of the facts yet and it is conducting an
internal investigation to determine the scope and magnitude of the problems.

Still, the company said it does not believe its 2001 results or 2002
guidance will require restatement.

``We're hopeful that it is limited to 1999 and 2000, although there are
still no absolute assurances that it's not crept into other periods,''
Sterling Auty, an analyst with J.P Morgan said. He downgraded Network
Associates stock to ''market-performer'' from ``buy'' when the SEC probe
was unveiled, he noted.

The accounting problems, which were spotted during the preparation of a
``routine'' amended tax filing, are likely to affect both revenue and
expense figures, Network Associates officials said during a conference call. Chief Executive Srivats Sampath said the withdrawal of Network
Associates' offer would not have any effect McAfee's day-to-day operations.

``What does it mean to us? In a nutshell, nothing,'' Sampath said on a
conference call with analysts.

The CEO also stressed that Network Associates' accounting problems would
not have any effect on McAfee's own financial statements or guidance.

``It will have no effect whatsoever. We have separate accountants, separate
books and separate outside counsel ... for all practical purposes we're a
completely separate company,'' he told Reuters.


Network Associates said its findings are unrelated to the SEC
investigation. It said it told SEC staff about the probe and that it would
report further findings in two to three weeks.

It added that the inaccuracies appear only to affect the Network Associates
side of the business, not McAfee, in which Network Associates owns a 75
percent stake after spinning the company off about 3 years ago.

Network Associates, whose software guards against hackers and viruses, said
it withdrew its offer for the anti-virus services company
because it felt that McAfee shareholders needed complete information before
tendering their shares. The offer was due to expire on Thursday.

``We have to withdraw the offer at this point because it's a
stock-for-stock transaction,'' Samenuk said. ``The McAfee offer is done
right now. Done.''


Earlier this month, accepted a sweetened bid of $224 million
from Network Associates for the 25 percent stake of McAfee it does not
already own. The offer would have given McAfee shareholders 0.78 of a share
of Network Associates common stock for each outstanding Class A McAfee

Asked if he would consider another offer from Network Associates, Sampath
said he wouldn't rule it out but that he would only contemplate a deal once
Network Associates had fully resolved its accounting problems.

``If they come back in two weeks I would be mildly irritated,'' he said.
``They need to go and get their act together ... and then let's come back
and take a look at this.''

About one week after accepted the revised offer from Network
Associates, Sampath filed documents with the U.S. Securities and Exchange
Commission saying he planned to sell 200,000 common shares he owns in The filing was released on Thursday.

Network Associates, which competes with Symantec Corp. (SYMC.O), has been
reorganizing its operations since Samenuk and Chief Financial Officer Steve
Richards came on board in early 2001.

Network Associates has said the ongoing SEC probe is focused on the
company's practice in 2000 of booking revenues when products were shipped
to distributors instead of when customers bought the products.

Kevin Wagner, an analyst with Adams, Harkness & Hill Inc., questioned why
the problems were only coming to light now instead of last year after
Samenuk and Richards arrived to clean up shop.

``They should have looked at this a bit more closely when they first came
in,'' Wagner said. ``Why not sweep out all the cobwebs?''

R. A. Hettinga <mailto: rah at>
The Internet Bearer Underwriting Corporation <>
44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'

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