Befuddlement and buzz jointly greeted Intel’s announcement today regarding its pending acquisition of security-software vendor McAfee for $7.68 billion in cash.
Intel was not among the vendors I expected to take an acquisitive run at McAfee. It appears I was not alone in that line of thinking, because the widespread reaction to the news today involved equal measures of incredulity and confusion. That was partly because Intel was McAfee’s buyer, of course, but also because Intel had agreed to pay such a rich premium, $48 per McAfee share, 60 percent above McAfee’s closing price of $29.93 on Wednesday.
What was Intel Thinking?
That Intel paid such a price tells us a couple things. First, that Intel really felt it had to make this acquisition; and, second, that Intel probably had competition for the deal. Who that competition might have been is anybody’s guess, but check my earlier posts on potential McAfee acquirers for a list of suspects.
One question that came to many observers’ minds today was a simple one: What the hell was Intel thinking? Put another way, just what does Intel hope to derive from ownership of McAfee that it couldn’t have gotten from a less-expensive partnership with the company?
Many attempting to answer this question have pointed to smartphones and other mobile devices, such as slates and tablets, as the true motivations for Intel’s purchase of McAfee. There’s a certain logic to that line of thinking, to the idea that Intel would want to embed as much of McAfee’s security software as possible into chips that it heretofore has had a difficult time selling to mobile-device vendors, who instead have gravitated to designs from ARM.
Embedded M2M Applications
In the big picture, that’s part of Intel’s plan, no doubt. But I also think other motivations were at play. An important market for Intel, for instance, is the machine-to-machine (M2M) space.
That M2M space is where nearly everything that can be assigned an IP address and managed or monitored remotely — from devices attached to the smart grid (smart meters, hardened switches in substations, power-distribution gear) to medical equipment, to building-control systems, to televisions and set-top boxes — is being connected to a communications network. As Intel’s customers sell systems into those markets, downstream buyers have expressed concerns about potential security vulnerabilities. Intel could help its embedded-systems customers ship more units and generate more revenue for Intel by assuaging the security fears of downstream buyers.
Still, that roadmap, if it exists, will take years to reach fruition. In the meantime, Intel will be left with slideware and a necessarily loose coupling of its microprocessors with McAfee’s security software. As Nathan Brookwood, principal analyst at Insight 64 suggested, Intel could start off by designing its hardware to work better with McAfee software, but it’s likely to take a few years, and new processor product cycles, for McAfee technology to get fully baked into Intel’s chips.
Will Take Time
So, for a while, Intel won’t be able to fully realize the value of McAfee as a asset. What’s more, there are parts of McAfee that probably don’t fit into Intel’s chip-centric view of the world. I’m not sure, for example, what this transaction portends for McAfee’s line of Internet-security products obtained through its acquisition of Secure Computing. Given that McAfee will find its new home inside Intel’s Software and Service division, as Richard Stiennon notes, the prospects for the Secure Computing product line aren’t bright.
I know Intel wouldn’t do this deal just because it flipped a coin or lost a bet, but Intel has a spotty track record, at best, when it comes to M&A activity. Media observers sometimes assume that technology executives are like masters of the universe, omniscient beings with superior intellects and brilliant strategic designs. That’s rarely true, though. Usually, they’re just better-paid, reasonably intelligent human beings, doing their best, with limited information and through hazy visibility, to make the right business decisions. They make mistakes, sometimes big ones.
M&A Road Full of Potholes
Don’t take it from me; consult the business-school professors. A Wharton course on mergers and acquisitions spotlights this quote from Robert W. Holthausen, Nomura Securities Company Professor, Professor of Accounting and Finance and Management:
“Various studies have shown that mergers have failure rates of more than 50 percent. One recent study found that 83 percent of all mergers fail to create value and half actually destroy value. This is an abysmal record. What is particularly amazing is that in polling the boards of the companies involved in those same mergers, over 80 percent of the board members thought their acquisitions had created value.”
I suppose I’m trying to say is that just because Intel thinks it has a plan for McAfee, that doesn’t mean the plan is a a good one or, even presuming it is a good plan, that it will be executed successfully. There are many potholes and unwanted detours along M&A road.