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In late 1988, I was sitting in Cornell’s computer science lab working on a research project. Next to me, a graduate student with bushy, brownish-red hair and glasses had his head down on the table. I assumed he was sleeping. After about a half hour I peeked at what he had been writing on his screen. “I miss you,” was the only thing written on an open, but otherwise empty, e-mail.
A few days later, all the computers at Cornell went down. My mother, who was working at Siemens in New Jersey, called and told me that all the computers at her office had gone down and everyone was leaving work early. In fact, that day in November 1988, almost all the computers in the US connected to the internet went down. It was the first large internet virus, dubbed “the internet worm”, and it crippled thousands of computers.
The next day agents from the Federal Bureau of Investigation were all over the computer science department at Cornell. It turned out the student who had been sleeping at the computer next to me a week earlier, Robert Morris, had written
99 lines of code and released them into the internet as an experiment.
One headline at the time suggested the worm resulted in “$1bn in lost productivity”, an amount I dispute. But given the extent to which the internet has now taken over our lives, the financial damage today would undoubtedly be a much greater amount if a similar virus was unleashed.
Was it a malicious terrorist act as one newspaper suggested? It emerged it was simply
a program gone awry, never intended to have the harmful effect that it had. Once the furore died down (Morris was sentenced to three years of probation, 400 hours of community service in the Boston area and a $10,000 fine) the papers went on to other, more important, matters.
All this reminds me of the virus that spread two weeks ago. Alan Greenspan, former chairman of the Federal Reserve, said a US recession was “possible” later this year. The next day, the Chinese stock market fell almost 9 per cent, triggering our own stock market version of a virus that caused every market it touched to reel all the way into the next week.
But was the Shanghai market even down that week? In the days before its biggest fall in a decade, the market was up 13.8 per cent. So net-net, after the fall, it was up a healthy 4.8 per cent. Where is the crash? Often the media hype things up to terror status before the dust settles and they move onto the next headline event.
Even though it is almost 20 years since the Morris worm, the threat of another large scale internet virus that could take advantage of the hundreds of security loopholes that still exist on each of our personal computers, is big enough to make it worthwhile looking at the public companies that stand to benefit from this threat.
Most importantly, I am interested in Symantec, the world’s biggest computer security company. Like many good companies, Symantec has been hit by the failed integration of an acquisition. The idea was right: buy Veritas, a provider of storage software, because every corporation that needs to enhance its storage systems will also need to secure the stored data. And they will either use us, Symantec probably reasoned, or a competitor such as Microsoft.
The integration, though, has gone slower than people thought it would, in spite of initial excitement about the idea, and the stock has faltered. What intrigues me is it has faltered to the extent that quality value-oriented and activist hedge funds have been scooping up shares in the company.
Symantec has a $15.8bn market capitalisation, almost $1bn in net cash, and more than $1.5bn in cash flows, giving it a multiple over cash flows of just over 10. And analysts are expecting solid growth, in spite of the integration troubles. They expect earnings to rise from 95 cents in the year ending March 2007 to $1.10 for the year ending March 2008.
If you take a look at who is accumulating shares, it is a veritable “who’s who” of value investors. For one thing, Carl Icahn lists the stock on his recent filings. As does deep value investor Bruce Sherman of Private Capital. And activist investor Bob Chapman of Chapman Capital has been accumulating the stock although he has not actively called for change. I keep track of the holdings of all of these funds on a site I set up at www.Stockpickr.com.
My guess is if the stock stays down at these levels (it is trading at about $17), these investors will start clamouring for change. They will want a buy-back program, perhaps
an increased dividend, and they will want the company to put itself up for sale. Oracle and Microsoft, among others, are possible buyers. The stock can easily see a 30-40 per cent gain from these levels over the next year, particularly as growth kicks in.
Meanwhile, speaking of viruses, things did not end badly for the creator of the Morris worm.
After dropping out of Cornell’s graduate school, doing his community service and staying out of trouble for a few years, Morris co-founded Viaweb, a software maker that helped automate the process by which merchants could create online stores. Yahoo bought Viaweb in 1998 for $49m and it exists today as Yahoo Stores.
Morris went on to get a PhD at Harvard and now has tenure at the Massachusetts Institute of Technology. Not all terrible events have such a happy ending, but when the basic building blocks are there, good things happen.