Thursday, August 19, 2010

Intel To Buy McAfee for $7.7 billion to Expand Online Security Services

Intel Corporation has entered into a definitive agreement to acquire McAfee, Inc., through the purchase of all of the company's common stock at $48 per share in cash, for approximately $7.68 billion. McAfee will operate as a wholly-owned subsidiary, reporting into Intel's Software and Services Group. The transaction price represents a 60% premium to McAfee’s August 18 closing price of $29.93 per share, and reflects a multiple of about 3.2X revenues.

On a GAAP basis, Intel expects the combination to be slightly dilutive to earnings in the first year of operations and approximately flat in the second year. On a non-GAAP basis, excluding a one-time write down of deferred revenue when the transaction closes and amortization of acquired intangibles, Intel expects the combination to be slightly accretive in the first year and improve beyond that.

McAfee may be a small buy next to Intel’s $109 billion market capitalisation, but it is the group’s largest-ever acquisition and profits at the software company must more than double for Intel to make an economic return on its investment.

The acquisition enables a combination of security software and hardware from one company to ultimately better protect consumers, corporations and governments as billions of devices - and the server and cloud networks that manage them - go online. Intel elevates focus on security on par with energy-efficient performance and connectivity. The acquisition augments Intel's mobile wireless strategy, helping to better assure customer and consumer security concerns as these billions of devices connect.

Intel’s rationale behind the transaction as twofold. In the core computing market it extends Intel’s ability to offer security functionality as part of its platform strategy – providing the CPU, chipset/graphics, etc. and now security to customers. In the emerging embedded/ultra mobile space it allows Intel to control more of the hardware/software ecosystem, similar to other leading technology companies, by offering customers the
Atom CPU/chipset, the OS from Wind River and now new security features.

We believe the McAfee acquisition should drive interest back into other software acquisitions targets in addition to many software deals you have been reading on The Akbas Post. For security software specifically, the Intel-McAfee deal does not necessarily spark renewed interest in the group. Intel is not
immediately competitive with others building out data center footprints, like HP, IBM, Oracle. Hence, we’d expect these companies to prefer a partnership route with larger vendors such as Symantec, rather than an acquisition. If they were to become more interested in security, Check Point Software would have to be on the list. However we’d expect the Intel move is more focused on system security, where Check Point Software does not have a strong position.
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