Fear as motivator: why Intel acquired McAfee
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."
Taken together, those two software acquisitions total less than 13 per cent of the $7.68bn McAfee
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."
Why marry? Why not 'friends with benefits'?
When asked the question that was on eveyone's mind — namely, why go all-out and buy McAfee rather than merely partner with them? — Otellini had two answers at the ready. "One, that having a deeper collaboration, where we could look long term and try to look at the combination, the deeply-integrated combination of hardware and software capabilities, would add substantial value to our platforms and differentiation to our platforms.
"Number two, it became pretty clear to us that the value of that offering was fairly significant, and it made sense from a financial perspective to have that value accrue to Intel shareholders." Translation: we think we can eventually make a pile of money off this deal.
We're betting that Intel will need to spend a pile to earn that pile — a pile of marketing money, that is. McAfee is not exactly a beloved name among IT sales-influencers, but Intel remains a trusted brand among consumers.
And we're also willing to bet that Intel will use that brand power to first heighten fears of users of mobile devices that the soon-to-be-all-things-to-all-men cloud is replete with threats, and then assure them that a mobile device with Intel Inside™ is their best defense against what Otellini described as "the [growing] sophistication and frequency of security attacks against individual consumers."
James also beat the cloud-danger drum, saying: "Security is top of mind for consumers, and knowing that your PC, your smart phone or your Internet-connected device is securely connected to the network and to the world can change how useful that device really is."
DeWalt was almost gleeful about his company's "services and solutions covering endpoint security, network security and cloud security," noting: "With the explosion of new IP-connected devices and continued growth in the threat landscape, our opportunity has expanded dramatically and our strategy is paying off."
Don't get us wrong, we're not dissing security — it's an authentic need, and threats from miscreants, ne'er-do-wells, and evildoers are all too real. IT pros know this, but as the mobile marketplace has heated up, consumers are only now coming around to the fact that their pocket-able devices are also vulnerable — and as those devices become repositories of not only contacts and calendars but also of financial information and charge-card powers, a focus on security is a smart marketing strategy.
And it's a strategy that Intel could use to secure an advantage in its competition against such current mobile-processor market leaders as ARM. Your average consumer has no freaking idea what powers their handheld — ARM has essentially no brand presence. Intel spent approximately eleventy squillion dollars on its Intel Inside™ PC campaign, and that branding has a resonance that the company can extend to the mobile marketplace.
And not to put too fine a point on it, but Intel's mobile-processor offerings are not exactly flooding the market. As we noted  on Monday when Intel acquired another primarily consumer-level group, TI's cable-modem team, Chipzilla's Menlow mobile platform was a bust, the jury is still out on that beknighted platform's follow-on, Moorestown , and the company's first platform that has a real shot at handheld victory, Medfield , won't see the light of day until next year.
And before Medfield arrives, the ARM army — VIA, Qualcomm, Apple, and the rest — won't be standing still. Intel needs a differentiator. And it may have just bought one.
Also, Otellini is likely not blowing smoke when he says. "Everywhere we sell a microprocessor, there's an opportunity for a security software sale" — and by software, we're assuming he was referring to firmware, in-chip code, and bits and bytes on an installation disc. No matter what the delivery method, Intel may very well also build hardware-assisted security into its IT-level parts.
But the mass-market future is mobile and embedded, and that's where a well-crafted marketing plan could sway users into equating Intel with security. There are, of course, a veritable minefield of "ifs" to navigate, but don't put it past Intel to pull it off.
It's all about creating a perception in the minds of millions of consumers that the cloud is a scary place — a scenario, as we noted, that Intel went out of its way to promote in Thursday's webcast — and that big, powerful, secure Chipzilla can be those consumers' protector.
And although Otellini says that "Intel is giving its commitment to the McAfee brand," we wonder how far that commitment will reach after the planned acquisition clears its regulatory hurdles and McAfee in subsumed deep into the Intel fold.
That said, Intel's acquisition history , it can be argued, isn't firmly on their side. Previous acquisition binges — such as the 25 companies the company borged during the go-go dot-com years of 1999 and 2000 — that have taken Chipzilla away from the "Chip" focus of its core competency haven't exactly produced rousing successes. "Softzilla", we aver, simply doesn't sound right.
But times have changed. We believe that Otellini was right when he told those investors back in 2009 that the company's "growth opportunity" was in small stuff. It remains to be seen if the McAfee acquisition — by far the largest acquisition in
SoftChipzilla's history — can help secure Intel's relevancy in the mobile marketplace. ®