Update: McAfee.com recommends 'no' vote on NAI deal

The special committee of the board of the directors at McAfee.com Corp. today recommended that its shareholders vote against the deal in which parent company Network Associates Inc. would purchase the 25% of shares in McAfee.com that it doesn't already own.

The recommendation comes despite an increase in Network Associates' (NAI) offer from 0.78 of an NAI share for each outstanding share of McAfee.com to 0.90 of an NAI share.

The new offer "significantly undervalues" McAfee.com, according to a statement released by the Sunnyvale, Calif., company. McAfee.com, which is distinct from the McAfee Security division of NAI, said it rejected the deal because the company is experiencing strong subscription growth in its managed security services business and also because of what it called a decline in IT spending in the enterprise where Santa Clara, Calif.-based NAI plays heavily. McAfee.com also said it has greater value as an independent company than as part of NAI, based on the offer price. NAI's share price is also significantly down in the past few months, dropping the value of the deal, the company said.

The differing financial positions of the companies played a major role in the board's recommendations, said Srivats Sampath, CEO of McAfee.com. Even though NAI met the market's expectations for its second quarter earnings, the company has "negative business momentum," he said.

McAfee.com, on the other hand, "(has) executed phenomenally on the business plan," Sampath said.

McAfee.com's decision is "disappointing to us," said Kent Roberts, NAI executive vice president and chief counsel.

Nonetheless, NAI will continue with the offer of 0.90 of a NAI share and will make its case to the McAfee.com shareholders, he said. "This is a very good offer."

Despite the disagreement about the deal, neither side thought that the relationship between the companies would be affected.

NAI wants to bring McAfee.com back into the corporate fold to cut down on consumer confusion between McAfee.com and McAfee Security, as well as to target the consumer and small-to-medium size business market more strongly. NAI used to own all of McAfee.com until NAI spun it off.

The statement from McAfee.com's committee came only hours before the company was due to file documents with the U.S. Securities and Exchange Commission disclosing its position on the deal.

The recommendation is something of a surprise, since the board had agreed to an earlier buyout offer in which McAfee.com shareholders would have received 0.78 shares of NAI stock for each McAfee.com share they owned. NAI was forced to withdraw that offer, however, after it revealed that accounting irregularities would require the company to restate its financial reports for 1998, 1999 and 2000. It recommenced that bid, with the same terms, at the beginning of July (see story).

The deal rejected today by McAfee.com is the third time that NAI has launched a tender offer for its subsidiary. NAI had originally offered 0.675 of an NAI share for each McAfee.com share, but that figure was rejected as inadequate by McAfee.com in March.

NAI executives had been confident that the buyout would go through.

McAfee.com shareholders must vote on whether to tender their shares to NAI by July 30, Sampath said. If NAI receives a majority of the votes, or manages to up its stake in McAfee.com from 75% to 90%, the deal will go through, he said.

NAI's Roberts expects shareholders to approve the deal. The deal "is not conditioned on [the board's] approval," he said. "The real decision-makers are the shareholders of McAfee.com."

McAfee.com's Sampath agreed. "It's in the hands of the shareholders," he said. "If they say [the merger] is what they want, that is what we should give them."

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