Network Associates CEO victim of too much, too fast

Eric Lai

SAN FRANCISCO: Two months ago, Bill Larson, the chairman and chief executive

of computer security giant Network Associates Inc., didn't sound like a

burnt-out executive preparing for his last hurrah.

Larson, who through ambition and salesmanship had transformed a small

anti-virus company into a near-billion-dollar behemoth through a string of bold

acquisitions, declared to an audience of financial analysts that Network

Associates, which had stumbled badly in the spring of 1999, was finally on a

major financial upswing, with the 44-year-old marketing whiz leading the charge.

"We've gotten through the tough part," Larson said. Now "we're

here to build long-term success."

Still, there were signs that not all was well. Strolling through the audience

of analysts with a microphone in hand like a talk-show host - or a television

evangelist, as one former colleague says - Larson told analysts that the

companies distributing Network Associates' products were carrying a hefty seven

and a half weeks worth of inventory. That was inventory that could be returned -

causing millions in anticipated sales to be stricken from Network Associates'

balance sheets - if demand by corporate customers suddenly dried up.

Even the upbeat Larson admitted that put Network Associates in a vulnerable

position.

"We still get 50 per cent of our business in the last month of the

financial quarter," Larson said at the time, "much of it in the last

two weeks."

Blaming a sudden chill in demand from corporate customers, Network Associates

admitted this week that business in its final month would be horrible. The Santa

Clara-based vendor revised its forecasts for the fourth quarter ending December

31 downward by more than 25 per cent, saying it now expects to lose between $130

million and $140 million for the quarter.

The company says it is changing to a more conservative method of counting its

sales, a tacit acknowledgment that the company had been "stuffing the

channel" with products that customers suddenly no longer wanted.

Continued...

And Larson is on his way out, along with President Peter Watkins and Chief

Financial Officer Prabhat Goyal.

How this decision was arrived at - and when - is unclear. Larson told the

Wall Street Journal that he and his top two lieutenants told the board of

directors they decided to step aside for executives ready to put in the

ceaseless hours of managing Network Associates.

"You need somebody who's hungry and young and hasn't enjoyed huge

financial rewards to really get on an airplane and press the flesh with

employees," Larson told the Journal.

But another well-placed source says the company had begun looking for a new

CEO as early as November - putting it mere days or weeks after Larson's bullish

pronouncements, and seeming to put it at odds with Larson's account.

"Turnaround artist" needed



Larson will stay on as CEO until a successor is found, which the company hopes
will be within a month.

Analysts and insiders say that his replacement needs to possess the same

charisma and industry standing as Larson, while bringing some qualities Larson

seemed to lack, in order to win back the confidence of the investment community.

"What Network Associates needs is a turnaround artist," said Mark

Fernandes, an analyst with Merrill Lynch. Fernandes, who has long held a

"neutral" rating on Network Associates, believes that rather than

promoting from within, the board will hire a high-profile outsider "who can

focus the organization".

Network Associates ended Thursday at $4-1/8, down around two-thirds from its

closing price of $11-3/4 on Tuesday before the announcement, as a slew of

analysts downgraded the stock. McAfee.com Inc., a wholly-owned subsidiary, was

up 129 per cent to $6 on Thursday trading after dipping on Wednesday. Srivats

Sampath, chief executive at McAfee, said the company, which sells anti-virus

software to consumers over the Internet, says McAfee is immune to the turbulence

at its parent.

"Whatever's happened at Network Associates hasn't affected us," he

said.

Flying too high



Larson joined McAfee Associates in 1993 from Sun Microsystems Inc. when McAfee
had a single consumer product, 40 employees and a $60 million market value. His

dream was to build a one-stop shop for corporations to purchase their anti-virus

and security needs.

For that, Larson's hard-driving personality was a plus. Through a series of

acquisitions, culminating in the $1.7 billion merger with Network General in

1997, Larson created a monster of a company, that at its peak, sported a $6

billion market capitalization and had revenues of $990 million in 1998. For

that, Larson rewarded himself richly with tens of millions in stock and

exercised stock options.

But the same outsize personality, which may have helped Larson tame the small

five-person Board of Directors until recently, comprising mostly of long-time

McAfee colleagues and Larson loyalists, may have prevented Larson from seeing

problems ahead.

For instance, Network Associates formerly used aggressive balance sheet

tactics such as taking charges for "in-house research and development"

when buying companies in order to reduce bottom-line expenses. The Securities

and Exchange Commission nixed that, forcing Network Associates to restate

earnings for 1997 and 1998, causing the stock to plummet by more than half in

1999.

"The same charisma can backfire when you're making mistakes, because the

board isn't strong enough," said a colleague.

According to a San Jose Mercury News profile in 1998, Larson once publicly

referred to McAfee employees who opposed the merger with Network General as

"boat anchors" and "dead weight".

"It all still really came down to Bill," Fernandes said. "He

was the guy running the show."

(C) Reuters Limited 2000.