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Fear as motivator: why Intel acquired McAfee

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Analysis Intel and McAfee made a surprise announcement early Thursday that the chip megamaker plans to acquire the security-software giant in a $7.68bn all-cash deal, and across the technical and financial communities, the response was a nearly unanimous "WTF?"

But during a webcast conference with reporters and analysts, Intel CEO Paul Otellini and his crew performed an intricate dance designed to calm investors and explain the wisdom of the move — and to plow the fertile field of fear, and sow hints as to how Chipzilla plans to profit from the deal.

To soothe McAfee investors — who should need little soothing, seeing as how they stand to profit greatly from the deal — Otellini first reported that the acquisition has the unanimous approval of both companies' boards of directors, that McAfee will maintain its identity as a wholly-owned subsidiary of Intel, and that "Intel is giving its commitment to the McAfee brand and all McAfee product offerings."

Then perhaps to calm Intel investors skittish about profit-sucking turbulence that might be engendered by a whole-scale executive shake-up, Otellini noted: "We have a commitment by the McAfee management team to stay on for multiple years post-close."

But why McAfee? Intel is a chipmaker, not a "scare 'em then sell 'em" security-software outfit. Otellini's answer was architectural. "We have concluded that security has now become the third pillar of computing," he told his listeners, "joining energy-efficient performance and Internet conductivity in importance."

And that third pillar, Otellini believes, will be best implemented in silicon, not software. "We believe that security will be most effective when enabled in hardware," he said. "Joining the assets of McAfee with Intel will accelerate and enhance the combination of hardware and software solutions."

Intel's head of software and services Renee James cast the acquisition of the software giant as business as usual. "The proposed acquisition of McAfee executes against Intel's software strategy to grow our business by using software to enhance hardware," she assured her audience. "We've done this successfully with over a dozen software acquisitions, including Wind River and Havok."

James was referring to the $884m June 2009 acquisition of embedded-system software specialist Wind River and the $110m September 2007 snap-up of Dublin-based games-software toolmaker, Havok.

Taken together, those two software acquisitions total less than 13 per cent of the $7.68bn McAfee gamble gambit.

James also argued that Intel's focus on security is nothing new, calling the McAfee acquisition "a logical next step" in Chipzilla's security strategy. "Our active management technology and our vPro family of platforms have programmable defense filters that systematically guard against viruses and malicious attacks today," she reminded her listeners. "We also recently launched the Intel anti-theft technology, which will disable a computer if it's lost or stolen."

In the absence of CFO Stacy Smith, who was explained to be on "a well-earned sabbatical", Intel chief administrative officer Andy Bryant was given the task of explaining the acquisition's hefty price tag. "The purchase price of $48 per share includes a premium of approximately 50 per cent over the closing price of the stock yesterday and four weeks ago," he explained.

To those who believe that a 50 per cent mark up is a wee bit excessive, Bryant argued: "The premium is within the range of recent large software and securities transactions, and we believe it is a reasonable price for McAfee's growth and profitability and for the potential additional value McAfee and Intel can bring together."

It's not that Intel can't afford it. Its latest SEC filing for "best quarter in the company's 42-year history" notes that Chipzilla had $5.5bn in cash and cash equivalents, plus $6.7bn in short-term investments and $6bn in trading assets. Along with a few other inputs, Intel's marketable-asset pile added up to $23.9bn as of the end of June.

In response to a question, however, Bryant advised the moneymen to not expect that the "potential additional value" would boost the bottom line of those SEC filings anytime soon. "In the beginning what we'll see is about a break-even effect for Intel," he cautioned, "and then we see the acceleration into our P&L taking place more towards the middle of the decade."

Asked exactly in what parts of Intel's product line hardware-enabled security would go, James first spoke in generalities — "I would say, anywhere Intel is selling silicon" — but then emphasized opportunities in the embedded market. "We think that there's an explosive growth opportunity in the embedded," she said, "and by embedded, we include ... traditional embedded devices as well as new, emerging categories like Internet-connected TVs and other markets that we can serve and reach with Atom."

McAfee president and CEO David DeWalt also focused on embedded systems. "We are seeing an explosion of billions of devices on the Internet. Those devices need to be secured," he suggested, "and with the threat landscape ... the embedded market is a very specific and high-opportunity market for us."

Otellini, however, broadened the acquisition's target. "Everywhere we sell a microprocessor, there's an opportunity for a security software sale to go with it," he explained.

Such a broad focus is, of course, an important message for Otellini to promote, but the Intel CEO has often spoken of his company's growing interest in the embedded market — such as at last year's Investor Meeting, when he talked about consumer electronics and embedded applications, among other small-scale items, saying "That's what we're aiming at. This is where we think the growth opportunity is for us."

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