McAfee buy moves Intel toward IBM model

August 20, 2010 // Dylan McGrath

Intel Corp.'s proposed $7.68 billion acquisition of security software vendor McAfee Inc. moves the No. 1 chip vendor further down a diversification path that could eventually see the company relying less on chip sales and more on software and consulting services, according to a Wall Street analyst.

"Over the long term, concerns about the potential slowing of Moore's Law could drive Intel to increasingly diversify away from just chips, and more towards software and consulting services—something closer to the IBM model," wrote Craig Berger, an analyst with FBR Capital Markets, in a report circulated Thursday (Aug. 19).

"If Intel does pursue this business strategy, we could expect to see a host of other acquisitions that build scale for Intel's software and services division," Berger said.

Intel (Santa Clara, Calif.) said Thursday it entered into a definitive agreement to acquire McAfee for $48 per share in cash, a 60 percent premium over McAfee's closing price of $29.93 Wednesday. Both companies' board of directors unanimously approved the deal, Intel said.

Berger drew parallels between the proposed McAfee deal and Intel's 2009 acquisition of embedded software vendor Wind River Systems Inc. At the time, Berger and other analysts speculated that Intel would continue pursue added software exposure as a way to embed more value and IP into its chips.

Intel said it has made a series of recent software acquisitions "to pursue a deliberate strategy focused on leading companies in their industry delivering software that takes advantage of silicon." The company said it would integrate McAfee technology into its chips to enhance security. Providing security in an increasingly online world "requires a fundamentally new approach involving software, hardware and services," the company added.

"Hardware-enhanced security will lead to breakthroughs in effectively countering the increasingly sophisticated threats of today and tomorrow," said Renée James, Intel senior vice president and general manager of the company's Software and Services Group. "This acquisition is consistent with our software and services strategy to deliver an outstanding computing experience in fast-growing business areas, especially around the move to wireless mobility."

McAfee will operate as a wholly-owned subsidiary, reporting into the Software and Services Group, Intel said.

Meanwhile, Berger noted that there has been increasing speculation that Intel is a likely buyer of Infineon AG's baseband business. Earlier this month, analyst Will Strauss of Forward Concepts Inc. said Intel is the most likely buyer for business, though he added that Broadcom Corp. would be a better fit and that Samsung Electronics Co. Ltd. is clearly interested. Intel also announced earlier this week it would buy Texas Instruments Inc.'s cable modem product line for undisclosed terms.

Berger said an Intel buy of Infineon's baseband business would have both positive and negative implications for Intel. It would give Intel a sizable presence in the cellular baseband market with customers including Apple Inc. and Nokia, as well as access to solid ARM Technology Holding plc cores, Berger said. But he added that Intel does not have a great track record of success outside of its core Intel architecture and said involvement in the baseband business could be a distraction for management.

"Touting Atom chips and ARM based-chips could be somewhat confusing to customers," Berger said.

Berger maintains a "market perform" rating on Intel stock, equivalent to "hold." Intel's stock declined in the wake of the deal, shedding 3.6 percent of its value to trade at $18.99 in afternoon trading Thursday.

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