Intel To Purchase McAfee For $7.68 Billion In Cash

Intel rocked the security community today by announcing plans to buy McAfee -- a $7.68 billion deal that ultimately solidifies its strategy of baking security into silicon and staking a claim in the wireless market. The chipmaker says it now considers security the third pillar of computing -- alongside energy-efficient performance and Internet connectivity.

The deal -- valued at a 60% premium over McAfee's market cap as of closing-time yesterday -- took many in the security industry by surprise; rumors of HP buying McAfee had been swirling around the industry for months but never materialized. Intel executives say the deal to buy McAfee through a cash purchase of its common stock at $48 per share -- subject to regulatory and shareholder approval -- was a natural progression in an 18-month development partnership between the two companies, which will yield its first products in early 2011.

Intel executives say hardware-enhanced security will pave the way for new ways to defeat today's threats and those in the future. "This acquisition grows our business of using software to enhance hardware," said Renee James, senior vice president and general manager of the Intel's software and services group, in a webcast this morning officially announcing the deal, which Intel hopes goes through by the end of the year. "Our teams have been working to build enhanced security solutions to better protect against malicious events."

James wouldn't give specifics about the upcoming products due early next year, but said they would not require building new silicon and would use existing hardware enhanced with McAfee security products and other features.

McAfee will operate as a wholly owned subsidiary that reports to Intel's software and services group, and will maintain its current product lines. According to Intel, McAfee executives have committed to staying on for "multiple years" after the deal closes.

But McAfee's security technology won't exclusively be used in Intel's family of products, according to Intel executives. "We intend to continue to work with other security vendors. This is not a McAfee-only kind of strategy," said Paul Otellini, president and CEO at Intel, during the webcast. "By having McAfee in the Intel family, [there will be] deeper integration [of the products] and the best capabilities possible to offer."

The deal also plays into Intel's plans for shoring up security in embedded device products, such as mobile devices, Internet-ready televisions, automobiles, and other consumer offerings. "Anywhere Intel is selling silicon, security is as applicable in the data center as it is to the embedded device to the PC," Intel's James said.

This isn't Intel's first brush with antivirus: It sold its LANDesk AV products to Symantec in the late 1990s. "Intel comes full circle as it reinvests in anti-malware security," says Peter Firstbrook, Gartner research director. While the acquisition could help Intel battle ARM for the embedded processor market in the long-term, it may be troublesome for McAfee products, he says. "[It] is fraught with potential pitfalls for McAfee's existing customers if the company gets distracted in a very competitive market," Firstbrook says.

McAfee's network security products, such as its network IPS, firewall, secure Web and email gateways, aren't a synergistic fit with Intel, Firstbrook notes. "While there can be some IP and R&D at McAfee that will be able to help Intel in its goal of offering more security features in its chipsets and related software utilities, it is unclear that they needed to own the company to deliver this," he says.

Security experts are skeptical of the hardware-based security approach Intel is promoting. Hardware updates are no simple process if there's a security vulnerability to patch, experts say. Arabella Hallawell, vice president of strategy for Sophos and a former analyst with Gartner, says while consumers prefer to have security built in so they don't have to worry about it, it's not necessarily ideal for enterprises. "They have very specific business needs and require lots of focus on what's needed to make security work in their infrastructure ... making software and solutions fit the threats, policy, and data protection [they require]," she says. "This is not particularly good for businesses because it defocuses security companies."

And with embedded devices, software will always be involved, including at the policy level, she says. "How much Intel requires McAfee to refocus around chip-based security is going to be interesting to watch," she says.

Andrew Jaquith, senior analyst with Forrester Research, doesn't buy the hardware platform strategy Intel is pushing, either. "Most enterprises take the least-common-denominator approach to managing their computing assets. This is largely because refresh cycles cause hardware platforms stick around much longer than software-based ones: It is easier to push down a software update than to pull a motherboard. I am not convinced that a hardware-based strategy for security will resonate with enterprise buyers," Jaquith said in a blog post today. "Despite Intel’s efforts to add more differentiating 'professional' features on and around their core processor silicon, these are seen as a bonus, rather than the centerpiece of enterprise management strategies. It is hard to see how 'McAfee Inside' would work out any differently."

Other problems with the deal are that Intel doesn't know software, and that neither Intel nor McAfee are major players in the mobile space, Jaquith argues. "In the mobile market, Intel has had its lunch eaten by ARM Holdings, a company whose energy-efficient designs have underpinned the chips of choice on mobile devices like Apples iPad. And for McAfee, it has recently acquired two mobile security companies -- Trust Digital and TenCube. McAfee also (earlier) bought SolidCore for the embedded market, a move that looks savvy in hindsight. But speaking charitably, neither of these most recent two acquisitions will be (as the equity analysts like to put it) 'accretive to earnings or revenues' in the short to medium term," he blogged.

The Intel-McAfee deal, if approved, could signal a new wave of major consolidations in the security market, experts say. "It's a harbinger of the increased consolidation of security into infrastructure providers via services, the network, or hardware," Sophos' Hallawell says. "Security has become much more integrated into the fabric of both the enterprise and in consumer security awareness. You're going to see more security consolidation with infrastructure providers as they see security as a way to differentiate their product lines and services."

Meanwhile, Intel's current security product portfolio includes Intel Anti-Theft (AT) Technology for laptops, which disables a machine or device that's lost or stolen; Intel vPro Technology, which manages PCs with remote encryption management, AT, and Intel Active Management Technology in its VPro processors, which discovers, updates, and manages out-of-band PCs; and Intel Trusted Execution Technology, hardware extensions to Intel processors and chipsets that adds protected execution, measured launch, and other security features.

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