Intel Pays $7.7B for McAfee Security

Chip giant enters security market with largest acquisition in company’s 42-year history.

August 19, 2010

D.H. Kass

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Intel Corp. said it will pay $7.68 billion, or $48 per share in cash, for McAfee Inc., the $2 billion security vendor, marking the chip maker’s largest and most significant foray outside its core business in its 42-year history.

The transaction, which Intel suggested it had been quietly eyeing for some time, has been approved by the boards of directors of both companies. The deal constitutes a 60 percent premium for McAfee shareholders over the security vendor’s most recent closing stock price of $29.93.

Intel said that it expects the transaction to slightly dilute earnings in the first year of operations and turn approximately flat in the second year.

Officials said that McAfee will operate as a wholly-owned subsidiary run by Dave DeWalt, its current president and chief executive, within Intel’s Software and Services Group, headed by Renee James, Intel senior vice president and general manager.

McAfee’s executive leadership will be retained, James said.

The companies said that the deal, which is subject to regulatory approval and must be affirmed by McAfee’s shareholders, is expected to close in a “few quarters.” In the meantime, McAfee will operate as usual, DeWalt said.

With the transaction, Intel adds identity beyond its chip-making heritage, while McAfee gains geographic and customer reach, brand name recognition and a global employee base, officials said.

The McAfee purchase fits with Intel’s strategy to build its software and services business by “bringing in expertise in software and services in order to deliver high performance platforms to fast growing sectors," James said. "McAfee is the next step in that strategy,” she said.

In April, Intel publicly affirmed its intention to add products and technologies that expand its reach to new markets, such as its $884 million purchase of software developer Wind River Systems Inc. last year, which bought the chip maker technology that embeds in a wide range of devices, including mobile phones.

The idea, of course, is to snap up companies whose software can take advantage of Intel’s silicon, namely, gaming, visual computing, embedded device and machine software and now, with the McAfee acquisition, security.

James said the acquisition is particularly critical to Intel because the company has elevated security’s strategic importance to the same level it regards power efficient performance and Internet connectivity, two core elements of its business.

“Going forward we believe security has become the third pillar of computing and will continue to grow in importance across all segments of the market,” James said. “By bringing McAfee’s core security DNA into Intel we believe we can better offer solutions to our products and to the market.”

She suggested that in the next year, McAfee will introduce a new security offering under the Intel banner that results from the companies’ collaboration prior to and after the acquisition is completed.

Explosion in connected devices prompts new security measures

With the growth of connected devices expected to approach 50 billion in 10 years—including IP-enabled gear, Internet-enable televisions, IP-addressable cars--the acquisition reflects security’s position as a “fundamental component of modern computing” and its “relevance in a completely connected world,” DeWalt said.

“Unfortunately, cyber criminals and cyber terrorists are misusing the Internet’s open and any-to-any communication architecture for malicious purposes leaving many users at risk and the future of the Internet as we know it today in question,” he said.

DeWalt suggested, as have others, that an explosion in the number of connected devices, with an associated uptick in opportunity for cyber criminals, could swamp the efforts of even the most forward-looking security vendors to quell the tide.

Some technologists and analysts believe that security features and operations offered by McAfee and its rivals ultimately will be built into chips and embedded in devices, and DeWalt hinted that such thinking may prodded the deal along.

“The current cyber security model isn’t extensible across the proliferating spectrum of devices,” he said. “The industry needed a paradigm shift—incremental improvement simply couldn’t bridge the opportunity gap.”

McAfee currently offers software security solutions, including end-point and networking products and services focused on protecting Internet-connected devices and networks from malicious intrusions.

As with its competitors, McAfee’s revenue largely is derived from subscriptions to its products. The company posted 80 percent gross margins last year.

Intel appears to be recovering quite nicely from the recession, recording Q2 2010 record sales of $10.8 billion, a 34 percent year-over-year increase, and net income of $2.9 billion for the period, a 175 percent jump, the best quarterly performance in the company’s history, attributed largely to significant increases in PC and server shipments worldwide.

Earlier this week, Intel agreed to purchase Texas Instruments Inc.’s cable and modem product line to bolster its cable industry and consumer electronics profile.

TAGS: security,software,Intel,acquisition,McAfee

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