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Intel puts faith in fear mongering

Analysis Latest theories on the McAfee deal
Mon Aug 23 2010, 16:24

THE FALLOUT from Intel's decision to buy McAfee for $7.68 billion has been one of bewilderment. Shortly after the announcement, we ran with the notion that Intel is buying the insecurity outfit to have a unique selling point in the embedded chip market. Frankly, we could have picked any of a handful of theories, judging by the reactions of analysts and other journalists around the globe and been equally as wrong, or right.

As the dust has settled, Intel's rationale hasn't become any clearer. Talk around the office centred around whether the deal was some sort of tax dodge. After all Intel, despite common misconceptions, is not a California company but rather incorporated in Delaware, partly due to that state's lax taxation laws, so it's not beyond the realms of possibility that a multi-billion dollar firm wants to save a little on its taxes to please its shareholders, many of whom are Intel employees.

Not content with our encyclopaedic knowledge of taxation laws and other financial trickery, we decided to contact someone a bit more qualified from the Chartered Institute of Taxation to see if that theory has any mileage. Sadly for the conspiracy buffs out there, we were told that because Intel decided to do the deal with hard cash, it means that it is even harder for the firm to do any funny business to avoid taxes.

So why exactly would a semiconductor company want to pony up $7.68 billion in cash? In such mergers or in this case, a buy out, usually some portion of the deal is some form of equity swap, typically shares. This aspect of the deal is just as odd as Intel's decision to pick McAfee. Make no mistake, even for Intel, $7.68 billion is a lot of cash.

In its last financial report, released at the end of June, Intel stated that it valued 'cash and short term investments' at $18.3 billion, of which $5.5 billion was cash or equivalent. This means that it has to 'realise' or acquire cash from somewhere. Now that we've determined that $7.68 billion isn't exactly loose change, why splash out? According to our man at the Institute, it could be a simple case of not wanting to share any profits it makes through selling on McAfee.

If Intel were to do a stock swap then any profits that were made by selling off McAfee's assets in the future would be shared among the new stockholders. Our beancounter also added that it is not clear how Intel will raise the capital for the deal. It is highly unlikely that Intel will simply empty its wallet in one fell swoop, and given that its total assets are valued at almost $57.7 billion, it shouldn't be hard for it to raise such a $7.68 billion loan, especially with Intel's conservative 'blue chip' status in the market.

Why borrow when you don't have to? It's the same reason for taking a mortgage out on a property even if you are lucky enough to afford the whole property in the first place. It lowers the initial outlay, keeping capital available for other expenses or acquisitions. But the best bit of the deal is that any profits made are enjoyed by the entity taking out the loan, in this case Intel. The ways Intel finances its deals are, like all corporations of its size, not simple transactions. However such reasoning could be used to promote the notion that Intel views McAfee as a firm it can partly cannibalise and then sell on.

During its analyst call, held an hour after announcing the deal, Intel did all it could to play up the quality of the company it is buying. That's not surprising as it needed to justify why it will pay 60 per cent more per share to acquire McAfee, but it also promoted up the security software market in general. Though the biggest winners in this deal are McAfee shareholders, even its competitors must not be feeling too bad after hearing Intel promote the importance of their industry.

It seems that antivirus vendor Avast Software wasn't far behind McAfee's coat tails, announcing that it had managed to secure $100 million in funding from a private equity firm. While $100 million is mere pocket change in comparison to Intel's deal, it does go to show that Intel isn't the only outfit to foresee profit in security software.

An interesting viewpoint put forward by Erik Suppiger, managing director and senior research analyst at Baltimore investment bank Signal Hill, was that Intel is buying "a lot of McAfee that it doesn't need". From the statements made shortly after announcing the purchase, Intel mentioned McAfee's research and development as one of its core assets, but spent little time talking about the insecurity company's instantly recognisable retail products.

McAfee's security products could end up being something of a distraction for Intel. After all, the vast majority of Intel's chips end up in the hands of OEMs, meaning that its exposure to end users and their troubles is limited. One has to wonder what, if anything, McAfee's current line of antivirus products will give Intel, aside from a headache.

According to Suppiger, McAfee could well have forced Intel to purchase the whole company rather than parts of it, something that he labelled as an "expensive strategy" on Intel's part. If so, it's a shrewd move by the McAfee board, because had it decided to sell off parts of the firm to Intel, whatever else was left behind might be seen as worth far less by investors.

Suppiger all but confirmed our initial view that Intel's push for mobile network security is merely a means for the firm to drive adoption of its processors. While not ruling out Intel producing a 'security chip' for installation in core network equipment, he says it is unlikely because the market is simply not big enough for it to be worthwhile. Suppiger points out that network equipment designers such as Cisco and Juniper already use third party security chips such as those built by Cavium Networks in products.

The push for wireless merely mirrors Intel's strategy with WiFi and when it introduced the Centrino chip combination. Suppiger cited that the proliferation of mobile wireless has increased the market for endpoint security, saying that a firewall is simply not enough to preserve security any longer. According to Suppiger, users' increasing concern with data security will allow the firm to push itself as a trusted brand.

A number of our readers commented that Intel has lost direction by spending so much money on a firm that makes software of questionable quality. There's always a risk when branching out says Suppiger, and selling software to OEMs is harder than flogging boxed software to consumers. Even Michael Dell was unwilling to comment on what the deal meant for his firm's business relationship with both Intel and McAfee, saying that he needed to "understand the deal a bit more".

Other readers mentioned that Intel needs to optimise antivirus software to run on its chips as users can see orders of magnitude performance increase when using GPGPUs to run antivirus software. It is true that Intel will optimise security software to run on its chips, though it is unlikely that the GPGPU is the main driving force behind Intel's push. In the high performance computing market, the GPGPU is a major threat but when it comes to consumer oriented technology, Intel's biggest threat is in the mobile embedded market where at present it simply doesn't have a leg to stand on.

It's quite clear that Intel is hoping that insecurity fears and its heavily optimised security will be a unique selling point to push its products. There's nothing particularly wrong with this strategy and given Intel's clout within the industry, it is unlikely the company will fail completely. Much like HP's merger with Compaq might be seen as having been a success, the vast sums of money involved in that buyout and Intel's deal will always leave doubts as to whether they were the best returns on investment.

It's surprising to see that even industry professionals are having trouble figuring out what is behind Intel's big money purchase. This could of course become a business masterstroke by Intel, but it is still possible that Intel and its investors will decide that it vastly overpaid for a security software company. µ


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