In this photo illustration, the NortonLifeLock company logo is displayed on a smartphone and PC screen.

Pavlo Gonchar | SOPA Pictures | LightRocket | Getty Images

(This article was first sent to CNBC Investing Club members with Jim Cramer. To get real-time updates delivered to your inbox, subscribe here.)

Shortly before the closing bell, we will buy 300 shares of NortonLifeLock (NLOK) at around $ 24.89. Following the transaction, the Charitable Trust will own 2,600 shares of NortonLifeLock, representing 1.53% of the portfolio.

As a reminder, if our trade alert is issued less than 45 minutes during the trading day, Jim executes the transaction 5 minutes before the market closes. In the meantime, we assume that Investment Club members will receive a better market price than what we are doing.

NortonLifeLock announced Monday morning that its ongoing merger with European consumer cybersecurity company Avast had been cleared by the US Department of Justice. The news crosses a regulatory hurdle that we believed carried some risk as the deal brings together two of the top three market leaders in consumer cybersecurity. NortonLifeLock continues to expect the transaction to close in mid-2022.

Despite what we believe to be positive news, shares in NortonLifeLock are noticeably under pressure today, down around 2-3% at the time of writing. Several names in the cybersecurity space were trading lower on Monday after Morgan Stanley launched CrowdStrike with an underweight, but there could be a company-specific reason that also explains the drop in NLOK.

What causes withdrawal

We believe today’s pullback may be due to NortonLifelock having to issue shares as part of the transaction. The final terms of the deal depend on the election of Avast shareholders – the meeting is scheduled for Thursday – but investors overall don’t like their percentage of company ownership being diluted. No matter how much stock NortonLifeLock needs to put in place, we are comfortable with dilution for several reasons.

More importantly, the merger of NortonLifeLock and Avast makes both strategic and financial sense. It creates the industry leader in consumer identity and privacy solutions with more than 500 million users and approximately 40 million direct customers. We see these numbers increase in the years to come, as the combined company rolls out a comprehensive consumer cybersecurity offering – which is a significantly unpenetrated market that will only grow in importance as more and more. of our daily lives will take root in the digital world. .

The deal also offers significant value creation opportunities, with management identifying $ 280 million in annual gross cost synergies.

Additionally, if Avast shareholders choose the majority share purchase option, NortonLifeLock plans to partially offset the dilution and optimize its capital structure by increasing its current share buyback program to 3. billions of dollars. With the combined company expected to generate $ 1.5 billion in free cash flow per year, management will have the firepower to offset the dilution by repurchasing the shares first.

Final result

Given our positive view of the merger, we believe today’s retreat to the good news is a buying opportunity and we are strengthening our position. After making a few opportunists over the past six months, having sold 300 shares at $ 26.72 and another 300 shares at $ 27.47, we believe that NLOK’s return to below $ 25 represents a great level to start off with. buy back what we sold above.

We also note that NLOK is offering investors a solid 2% dividend yield which pays us back pending the merger close next year. Additionally, NLOK is trading at a mid-teens futures price to earnings, which is a big discount from rival McAfee’s less than 20 withdrawal multiple. NLOK may be growing slower, but we believe its multiple will increase as investors increase their appreciation of market leadership.

The CNBC Investing Club is now the official headquarters of my charity. This is the place where you can see every move we make for the portfolio and get my market snapshot before anyone else. The Charitable Trust and my writings are no longer affiliated with Action Alerts Plus in any way.

As a CNBC Investing Club Subscriber with Jim Cramer, you will receive a Trade Alert before Jim completes a trade. Typically, Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust portfolio. If the trade alert is sent before the trade, Jim waits 5 minutes after the market opens before executing the trade. If the trade alert is issued less than 45 minutes during the trading day, Jim executes the trade 5 minutes before the market closes. If Jim has mentioned a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. See here for investment disclaimer.

(Jim Cramer’s charitable trust is long NLOK.)


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