Network Associates, Inc.

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Network Associates, Inc.

2805 Bowers Avenue
Santa Clara, California 95051-0963
U.S.A.
(408) 988-3832
Fax: (408) 970-9727
Web site: http://www.nai.com

Public Company
Incorporated: 1989 as McAfee Associates, Inc.
Employees: 1,600
Sales: $612 million (1997)
Stock Exchanges: NASDAQ
Ticker Symbol: MCAF
SICs: 7372 Prepackaged Software

Network Associates, Inc. (NAI) is the world’s largest provider of computer network security and management software. It is also the tenth largest independent software company overall, with more than 1,600 employees worldwide and operations on six continents. The company was formed through the 1997 acquisition of Network General, Inc. by McAfee Associates. NAI’s flagship product is an integrated network security and management solution called Net Tools. Net Tools is built around two software suites: Net Tools Secure, which includes the antivirus applications that first brought McAfee to prominence; and Net Tools Manager, which includes Sniffer, the network management tool created by Network General. NAI currently maintains a presence in about 65 countries. It is estimated that 80 percent of the companies on the Fortune 100 list rely on NAI products to keep their computer networks running smoothly.

The Beginnings of NAI

The business that would eventually evolve into NAI began to take root in the mid-1980s. At the time, John McAfee was working as a senior engineer for Lockheed Corporation. As a spare time hobby, McAfee began operating his own computer bulletin board in 1986. Through his bulletin board, McAfee quickly became aware that computer viruses were one of the hottest topics among the electronically inclined. McAfee began working on a software product that could scan for viruses. In 1987 he began distributing his first antivirus product as shareware through his bulletin board.

The antivirus software was instantly popular. From the start, McAfee’s strategy was to hook individual users on the software. The individuals would then take it to work, and those corporations would like it so much that they would happily pay the licensing fee. By 1989 the product had begun to penetrate the corporate market significantly. McAfee decided to turn the operation into a real company, dubbed McAfee Associates, that year. McAfee’s company lost $95,000 on revenue of $48,000 during its first year of operation. By 1990 money from corporate purchases began to pour in. Sales reached $1.6 million that year, and McAfee earned a cool million in profit. In January of 1990, McAfee quit his job at Lockheed to concentrate on the new venture full-time.

By 1991 McAfee’s profit zoomed to $4.3 million on revenue of $6.9 million. A study by the San Jose, California research firm Dataquest Inc. indicated that as of November of 1991, 62 percent of antivirus software users bought licenses from McAfee. In spite of the product’s popularity, the company continued to give its software away to anybody who wanted it. All they had to do was download it from one of thousands of electronic bulletin boards. As risky as this system seemed, by 1992 McAfee had 10,000 paying licensees at corporations, government agencies, and other institutions, including 66 Fortune 100 companies. A big factor in McAfee’s spectacular surge during 1992 was the widespread panic about a computer virus called Michelangelo, which destroyed all of the data on a computer’s hard drive. By coming up with a cure for Michelangelo, McAfee not only sold lots of antivirus software, but also became the focus of a great deal of media attention. During the Michelangelo scare, McAfee was quoted widely as predicting that the virus could affect as many as five million PCs worldwide. As it turned out, the impact was far smaller.

An IPO in 1992

McAfee went public in October of 1992, raising $42 million in an initial public stock offering. By 1993 the company had licensed its antivirus software to more than 15,000 corporations.

One of the most amazing aspects of McAfee’s phenomenal success in its early years was its stunning after-tax profit margin of about 45 percent, a figure substantially higher than the industry average. The key was in the company’s minimal overhead costs. As late as 1993, McAfee still had only 36 employees. This was made possible by the fact that McAfee software was distributed electronically. There was no need for the labor, equipment, or space a company would normally need for manufacturing, packaging, distributing, and marketing operations. All the company needed were programmers, support personnel, and some computers, all of which fit neatly into 6,400 square feet of space in Santa Clara, California.

In spite of McAfee’s success, however, the stock market was not always kind. In 1993 stories began spreading that the company’s Michelangelo cure, known as Clean-Up, was causing damage of its own to the computers on which it was installed. Although these claims were apparently exaggerated, McAfee saw the value of its stock plummet from the mid-20s to below ten during the early part of the year. Further bad press resulted from a lawsuit that forced McAfee to stop distributing two of its applications because they were incorrectly identifying Image-line Inc.’s PicturePak software as a virus carrier.

After suffering a mild heart attack later in 1993, McAfee handed over the day-to-day operation of the company to Bill Larson, who had been recruited from his position as vice-president of sales and marketing at Sun Microsystems. Larson, who had also spent time at Apple Computer, was given the title of chief executive officer, and McAfee dubbed himself chief technology officer. From that post, McAfee’s chief role was to get back to his first love—namely, developing new technologies—while also seeking out acquisition candidates. With Larson at the reins, the company sought to broaden its offerings beyond virus battle gear. His goal was to make McAfee a software company that happened to distribute its wares electronically, rather than just an antivirus company. Distributing software without having to ship boxes around remained central to the company’s approach. Electronic distribution not only saved money, but it also made it possible to provide upgrades almost every month—a necessity to keep up with new viruses popping up every day—rather than every 18 months like most software companies.

Despite its high-profile role in the Michelangelo affair, McAfee was still stuck in the minor leagues of software companies as long as it was relying strictly on antivirus packages. In Larson, the company found a leader who could take the company to the next level. Expanding into areas outside of virus detection, McAfee bought two network-management software companies in 1994. By the middle of the year the company was offering about a dozen new software tools designed to help automate network management. Although Larson managed to convince a reluctant McAfee that they should sell their products in stores, the new network software also would be offered as shareware on a free-trial basis.

Focus on Networks in the Mid-1990s

With success inevitably comes competition. Even with the presence of bigger companies such as Symantec, however, McAfee still commanded about two-thirds of the market for antivirus software. Meanwhile, the company sought to attain a position in network management software as dominant as the one it held in virus combat. Larson pulled this off mainly through acquisitions, using McAfee’s slow but steady trickle of reliable cash flow. In 1994 McAfee purchased Brightwork Development Inc., the New Jersey-based maker of the Bright-Works network management software suite, and the network application company Automated Design Systems, based in Atlanta. The following year McAfee bought Saber Software Corp. for $40 million. The acquisition of Saber, combined with the earlier purchase of Brightwork, gave McAfee control of 41 percent of the U.S. market for LAN management software.

For fiscal 1995, McAfee earned $15 million on sales of $90 million. By 1996 antivirus programs were generating only 60 percent of the company’s revenue, although it still dominated the market. The rest came primarily from network security and management software products, which McAfee was able to sell at prices not much more than half of what its competitors were charging, since McAfee distributed its products over the Internet and the others had to shrinkwrap theirs and ship them to retail outlets. In come circles, Larson’s work was seen as nothing short of a miracle. In a 1996 article, PC Week trumpeted, “What’s happened to McAfee since Michelangelo … is a classic software industry turnaround story. Actually, since the company was never really going anywhere to begin with, blastoff might be a better word.”

McAfee’s string of successful acquisitions was interrupted briefly by its failed attempt to buy Cheyenne Software, Inc. for $1 billion. It turned out that Cheyenne, a developer of storage software for computer networks, was not keen on the idea of being taken over by McAfee. Cheyenne mounted a takeover defense strategy that included a media blitz publicizing the bid and disparaging Larson both personally and professionally. A war of words ensued, with both sides working the media furiously. Larson eventually withdrew the offer, but not before cementing his reputation as a brutal fighter in the corporate arena.

Company Perspectives:

The vision of Network Associates is to deliver the industry’s most comprehensive family of network security and management solutions. Network Associates has the ability to address the needs of the largest enterprises while leveraging investments for the development of future products. This new force in the software industry has a strong worldwide presence, enhanced engineering, larger support staffs, and will broaden the total network security and management solutions available to your company.

Nasty as it was, Larson’s scuffle with Cheyenne CEO ReiJane Huai was a mere tune-up bout for his conflict with Gordon Eubanks, chief executive of McAfee’s archrival Symantec. In the spring of 1997 Symantec filed a suit alleging that McAfee had stolen some of its proprietary code from a product called CrashGuard for use in one of its own software products, PCMedic. In response, McAfee countered with a $1 billion dollar defamation suit. As the verbal sparring heated up, Larson sent out a press release in which Eubanks was described as “once himself an accused felon for trade-secret violations,” in reference to a criminal case involving an employee Symantec had lured away from another rival, Borland International. Since Symantec had been cleared in the case, many observers saw Larson’s comment as a bit of a cheap shot. The two companies also exchanged accusations about misleading advertising claims on a regular basis. The rivalry between Larson and Eubanks, epic in the eyes of the software industry, accomplished something else—it kept the company’s name in the headlines of newspapers and trade journals. Larson has been known to play hardball with other industry executives as well, notably Alan Solomon of British competitor Dr. Solomon’s Software Ltd., whose name McAfee plastered over with the word “retired” in a 1996 ad, accompanied by the slogan “no wonder the doctor left town.”

Meanwhile, McAfee’s acquisition binge continued, notwithstanding the aborted takeover bid for Cheyenne. The year 1996 brought two significant annexations. Vycor Corporation of College Park, Maryland was purchased for $9 million and FSA Corporation, a Canadian security software manufacturer, was bought for $14.8 million. This expansion helped the company double its revenue in fiscal 1996 to $181 million, with net income soaring to $39 million.

1997 Merger Created Industry Giant

These acquisitions were followed by the 1997 purchase of Japanese and virus software manufacturer Jade KK for $21 million. The climax of McAfee’s expansion drive came later that year, when the company acquired Network General, a California-based network management software company, for $1.3 billion. Network General, which was actually larger than McAfee, was merged into the company to create Network Associates, Inc. (NAI), which instantly became the undisputed leader in the field of network management and security and the tenth largest independent software company of any kind. In Network General, the company obtained the well-regarded diagnostic tool Sniffer, one of the industry’s leading products for troubleshooting and monitoring the performance of computer networks. Larson was named chairman and chief executive of NAI, and Network General CEO Leslie Denend took the title of president.

Even the absorption of Network General was not enough to satisfy Larson’s appetite. Rather than rest, NAI plunged on with its master plan of industry domination. In December of 1997 NAI paid $35 million in cash for Pretty Good Privacy, Inc., a California maker of encryption software. Pretty Good Privacy’s encryption products then were bundled with McAfee’s antivirus software to create the Net Tools Secure portion of NAI’s Net

Tools package. Further acquisitions followed in 1998, including Trusted Information Systems, Inc. and Secure Networks, Inc. These additions further enhanced NAI’s reputation as the dominant force in network security and management.

July 1998 marked another important merger agreement for Network Associates, this time with Cybermedia, Inc., the producer of computer fix-it software products such as First Aid, Oil Change, and Guard Dog. Cybermedia benefitted from the deal by gaining access to NAI’s well-established marketing, distribution, and sales services, giving Cybermedia products increased access to the computer software marketplace. The merger gave NAI an even larger array of product offerings, adding Cybermedia’s diagnostic and problem-prevention software solutions to its already huge line of computer safeguarding applications.