McAfee Accepts Sweetened Network Associates Bid

McAfee.com Corp. Network Associates Inc.

Network Associates -- whose past accounting practices are under investigation by the Securities and Exchange Commission -- spun off McAfee in 1999 but continues to own about 75 percent of the company.

"It's pretty likely to go through now," Walter Pritchard, an analyst with SoundView Technology, said of the proposed transaction.

McAfee shares were up 87 cents, or more than 5 percent, to $17.37 at midday on Nasdaq. Shares of Network Associates were off 14 cents at $22.36 on the New York Stock Exchange.

If the deal goes through, McAfee, which sells subscriptions to anti-virus and PC management services, will become a wholly-owned subsidiary of Network Associates, and McAfee shares will no longer trade publicly.

Pritchard said bringing the two companies together would eliminate potential conflict when selling to small and mid-size businesses. "Right now, you have two different entities trying to sell to retail, so there's conflict," he said.

Network Associates has said the two companies offer similar products and services to increasingly the same customer base.

Network Associates shares fell when it originally announced its intention to buy the McAfee stake because it said the deal would dilute its 2002 earnings by about 1 cent a share, Pritchard said.

"It's about the only negative thing that people can point to, but we think it's minor," he said.

McAfee's board, which rejected the original offer, recommended that shareholders accept the sweetened bid. A McAfee special committee deemed the new offer "adequate."

Under the new offer, 0.78 share of Network Associates common stock will be exchanged for each outstanding Class A McAfee share, the companies said in a statement.

This represents a 15.6 percent increase over the previous exchange ratio of 0.675 and values McAfee shares at about a 6 percent premium over their Tuesday closing price of $16.05 on Nasdaq.

Network Associates made its original offer for the McAfee stake on March 18. At that time the offer was worth about $220 million. Since then, Network Associates' share price has fallen, reducing the value of the original bid to about $194 million.

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

The SEC probe is believed to focus on the accounting practices of Network Associates' previous management team. The company's announcement of the probe on March 26 sparked an 11 percent drop in its share price that day and led two Wall Street analysts to cut their ratings on the stock.

Network Associates has said the 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.

The company announced in December 2000 that it was changing that practice. On the same day, it announced a revenue shortfall and the resignation of its top three executives.

Pritchard said there was no indication that McAfee was involved in the SEC probe.

"The SEC has been fairly vague in what they're investigating," he said. "It looks like it's something in the last part of 2000, so there's no indication that McAfee was involved."

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