Despite the deal seeming to be on the brink of completion, Network Associates Inc. Thursday said that it is withdrawing its bid to buy out its subsidiary McAfee.com Corp. after discovering accounting irregularities that will cause it to restate its 1999 and 2000 financial results.
The discovery was made during an internal investigation of the company's books, according to a statement released by the Santa Clara, California, company. Network Associates' (NAI) accounting practices in 2000 are also under investigation by the U.S. Securities and Exchange Commission (SEC), though company Chief Executive Officer George Samenuk called the two matters "unrelated" on a conference call held Thursday morning. The company has informed the SEC of the matter, he said.
NAI does not expect to have to restate any of its 2001 or first quarter 2002 figures, the company said.
"We do not expect this to affect our day-to-day operations," Samenuk said. He said the company would report more details in two to three weeks.
As a result of the revelations, NAI announced that it would withdraw its offer of 0.78 shares of NAI stock for each outstanding share of McAfee.com stock. McAfee.com shareholders had until Thursday to vote on whether to approve the buyout or not, though McAfee.com's board had already voiced its approval. Network Associates owns 75 percent of McAfee.com.
On the conference call, Samenuk said that the problems were discovered "in the course of preparing a routine tax filing" and are still being investigated to determine their full scope.
"We do not, at this point, have a clear understanding of all the facts," he said.
It was necessary to pull the McAfee.com offer off the table because McAfee.com shareholders need to have an accurate view of NAI's financial records to make their decision on the proposed deal, he said.
The buyout process has been a start-and-stop affair for NAI and McAfee.com. McAfee.com had rejected NAI's original offer of 0.675 shares in late March. The day after that rejection, NAI announced the SEC investigation and postponed the acquisition. However, three days after that NAI announced that it would resume its bid. Despite the disruption of the deal, McAfee.com will not be affected, according to Srivats Sampath, chief executive officer of McAfee.com, who spoke on a separate conference call Thursday morning.
"What does (the withdrawal of the bid) mean to us? In a nutshell: nothing," Sampath said.
McAfee.com will continue with its work, including its new grid security service, its managed security services and its partnerships, he said. The buyout process was "a little distracting" and "did cause angst among the employees," but will not have any negative long-term effects on the company, he said.
Sampath also said he does not expect that NAI will attempt another buyout of the company any time soon.
"I'd be mildly irritated if (NAI) came back in the next couple of weeks and said they wanted to do it again," he said.
Sampath likely won't have cause to be irritated, however, as Kent Roberts, executive vice president and general counsel of NAI, said "we are withdrawing the offer and we are going to clean up matters here" when asked about a resumption of the offer on the call.
McAfee.com originated as a part of Network Associates and was spun out as a separate company in 1999. Despite the irregularities in NAI's 1999 accounting, McAfee.com Chief Financial Officer Evan Collins said on the call that he did not expect that the problems would affect McAfee.com's past financial statements.
The current executive team running Network Associates has been installed since the beginning of 2001. The management team that ran the company in 1999 and 2000 resigned en masse in late 2000.
The markets reacted badly to the news, sending shares in both companies tumbling in midmorning trading. NAI shares (NYSE: NET) were down US$5.55, or 23.4 percent, at $18.20. McAfee.com shares (Nasdaq: MCAF) dropped $4.94, or 26.7 percent, to $13.60.