Intel to acquire McAfee in $7.7 billion deal

If the deal is approved by McAfee shareholders, McAfee will operate as a wholly-owned subsidiary, reporting into Intel's Software and Services Group.

Intel Corp. has agreed to acquire McAfee Inc. in a massive $7.7 billion deal that expands the chip-making giant's presence into the security market.

Under the terms of the deal, McAfee, based in Santa Clara, Calif., will operate as a wholly-owned subsidiary, reporting into Intel's Software and Services Group.

They want to become more of a systems provider where they provide layers of services above and beyond just the core processor.

Andrew Jaquith
senior analystForrester Research inc.

Intel has been making an effort to expand beyond its core chip-making business. The company said it would pay $48 a share in cash for McAfee, a premium on McAfee's Wednesday closing stock price of $29.93. The deal needs McAfee shareholder approval and regulatory clearances.

Intel said the acquisition will enable the company to provide both security software and hardware from one company. Intel executives on the conference call with analysts and media pointed out the chipmaker's intent to integrate McAfee's security offerings into its silicon chips, in particular its Atom processors. Atom processors are embedded in smaller devices ranging from netbooks, smartphones and consumer electronics such as televisions.

"We see an opportunity for security anywhere Intel is selling silicon," said Renee J. James, senior vice president and general manager of Intel's Software and Services Group. "Security is as applicable in the data center and PCs as it is in embedded and other Internet-connected devices, even cars that might be connected."

Intel and McAfee have been collaborating for 18 months and James said Intel plans to release the first products out of that collaboration in early 2011. Analysts wondered, however, why Intel would need to spend $7.7 billion to acquire McAfee rather than continue the partnership between the two companies.

"As we worked on projects together, the notion of moving beyond partnering became clear," said Paul S. Otellini, Intel president and chief executive officer. We understood that having a deeper collaboration where we look long term and could have a combination of hardware and software capabilities that add value and differentiation to our platofrms. It became clear that the value of that offering was significant, and it made sense to accrue that value to shareholders."

Intel executives stressed that McAfee will continue to support its software and cloud-based products.

"The way to think about this is [to think] about enhanced security solutions that can be hardened and new opportunities to deter threats that we cant do alone in software," James said. "These enhanced products can only be created by unique hardware innovations in combination with the software McAfee sells today."

McAfee competes head on with Symantec Corp., offering a security suite of software that protects the endpoint and networking products and services. In addition to antivirus, McAfee sells a firewall, which it acquired from Secure Computing, an intrusion prevention system (IPS) and data leakage prevention software. McAfee has worked with hardware vendors in the past. It struck a deal with hard drive maker Seagate to provide encryption for its line of encrypted hard drives. It has also recently made acquisitions to bolster protection of mobile devices such as smartphones.

McAfee CEO Dave DeWalt said the movement from IPv4 to IPv6 will create an explosion of devices connecting to the Internet that need new measures of security.

"These devices need to be secure; it's a high opportunity market for us," DeWalt said. "With our threat intelligence, Web reputation and cloud services, being able to leverage Intel's platforms is very powerful. You're going to see the number of devices moving from under one billion (with PCs) to billions and billions of connected devices."

Intel is a hardware company in the era of the cloud. That doesn't mean hardware goes away but Intel needs to be looking for more unique ways to generate revenue and build out their business.

Pete Lindstrom,
research directorSpire Security

Merger was a surprise
The merger was a surprise to analysts. Although rumors of Hewlett-Packard Co. acquiring McAfee had circulated for years as a result of their close relationship, no one anticipated Intel moving into the security space with a major acquisition, said Andrew Jaquith, a senior analyst at Cambridge, Mass.-based Forrester Research Inc. Jaquith said Intel is making a move on the mobile market, building in security on hardware within mobile devices, rather than layering software on top of an already small footprint, Jaquith said.

"They want to become more of a systems provider where they provide layers of services above and beyond just the core processor," Jaquith said.

Intel will likely build a bigger stack around its silicon, he said. More specifically, McAfee could give a boost to Intel's vPro platform, which brings together a hardware management console for remote management, energy efficiency and security.

While McAfee has been an acquisition target for a while, Mike Rothman, analyst and president of research firm Securosis LLC, called the Intel acquisition baffling. Rothman said it's unclear how McAfee can help Intel embed security into its silicon. In addition, he said Intel doesn't have any sales channels that McAfee can play into.

"Clearly mobile and the cloud are really driving the strategy here," Rothman said. "I guess my real challenge with the whole thing is that security is important and something that is pillar of everything we do and it needs to be embedded in systems and hardware and probably silicon over time. But I'm not grasping how McAfee helps Intel get there."

Pete Lindstrom, a research director at Spire Security, said he doesn't expect any major changes as a result of the acquisition. McAfee has also been building out its mobile business, increasing its offerings for smaller devices at the endpoint, Lindstrom said.

"Intel is a hardware company in the era of the cloud. That doesn't mean hardware goes away, but Intel needs to be looking for more unique ways to generate revenue and build out their business," Lindstrom said. "I think McAfee fits in well with a hardware company that has a hardware-security strategy since they're putting chips in devices that are becoming more powerful and are used virtually everywhere."

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