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Posted by Jonathan Penn on August 23, 2010
Questions keep pouring in about this deal, so I'll attempt to answer the most common ones here. Practically every analysis I've seen calls this a "head-scratcher", and so they slam the deal simply because they don't understand it.
- This is not just about “antimalware-on-a-chip-for-smartphones”. Another side effect of people not understanding the deal is that they oversimplify it by reducing it to this one aspect. If it truly were just about that, Intel would have bought a pure AV company with a much smaller market footprint: There are dozens out there to choose from. AV-on-a-chip may be part of the equation. But more generally, this is about a wide range of embedded security features (not just AV, but data security and system integrity) on a wide range of devices. In fact, the press releases around Intel’s Wind River acquisition explains this more clearly than Intel’s and McAfee’s communications around this deal, where they referred to "Intel's strategy to grow its processor and software presence outside the traditional PC and server market segments into embedded systems and mobile handheld devices…[including] smart phones, mobile Internet devices, other consumer electronics (CE) devices, in-car ‘info-tainment’ systems and other automotive areas, networking equipment, aerospace and defense, energy and thousands of other devices”. (http://www.windriver.com/news/press/pr.html?ID=7081)
- Intel needs McAfee to thrive as a software business in its own right. In some areas, embedded security will be fully contained in the chip/system: such as Intel’s XD bit technology. In many areas, however, Intel’s success at embedded security will hinge on software to enable and manage it: Look at technologies such as OPAL or TPM as examples. Here, McAfee’s market footprint gives Intel a powerful vehicle for market adoption in both consumer and enterprise markets. And if McAfee puts it into their products, many of its competitors will likely follow. This is why it’s important for Intel to own McAfee rather than just partner with it.
- We need to look beyond Wind River as a model for how McAfee/Intel should evolve. A lot of people, including executives at McAfee and Intel, have been talking about Wind River as a model for this acquisition. McAfee will be a wholly owned subsidiary, as Wind River is, but that’s all we know so far, and I’m not sure that’s the best model to tout. The acquisition of Wind River is just a year old, and it’s too early to tell much there.
Yet while Wind River has been mentioned several times as a model for execution, everyone seems to have overlooked the interesting synergies between Wind River and McAfee. Wind River already has some embedded security features, and specifically ones that McAfee lacks, such as SSL VPN, wireless security, and crypto libraries. For embedded security, Wind River and McAfee are excellent complements.
I’m going to look to future acquisitions as a key indicator for whether this deal will be good or bad. Acquisitions are critical for the success of a diversified security vendor. There’s not enough of a track record yet with Wind River to see if Intel will support McAfee’s growth via acquisition (Wind River has had one small technology acquisition, Virtutech, since being acquired by Intel). A key question moving forward is, "How much leeway will McAfee get to acquire?” Or let’s pose the question this way: “If McAfee were part of Intel at the time, would it have been able to buy Secure Computing?”
So what is a good model out there? I pick EMC/RSA as a better model to emulate. EMC has been embedding some of RSA security technology into its products, it continues to support the RSA product lines in and of themselves, and it also develops new solutions that span lines of business (virtualization security and data classification come to mind here). Moreover, EMC has built RSA into a broader and more successful security business by acquiring Network Intelligence (SIM), Tablus (DLP), and Archer (GRC). RSA is now the brand of EMC’s security division, not just its authentication and encryption product lines. It is a stronger player in the market than it would have been if EMC did not acquire it and it had been left on its own.
The wisdom of the Intel-McAfee deal and long-term success of McAfee will hinge both on future acquisitions and support of its growth as a standalone security business and also on Intel’s ability to combine McAfee technologies and its own in new ways.
- Anti-trust concerns are avoidable or surmountable. I admittedly do not have a very nuanced understanding of antitrust issues, but it seems to me that the potential areas of concern center around (a) OEM relationships and (b) any interplay between McAfee software and the embedded security features. The former can be addressed by some sort of Chinese wall in its dealings with OEMs between Intel's chips/systems business and the McAfee relationships; at the least, Intel needs to be very careful how it leverages the PC channel for McAfee. The latter can be addresses through practices adopted by Microsoft and others whereby all integration is through open APIs to which McAfee competitors have equal access.
- The price is quite reasonable. McAfee 2010 revenues are expected to come in at about $2B, and the company has about $800M in cash. That puts it at a 3.4x multiple. Compare that with other security acquisitions of public targets, such as Websense's 2007 acquisition of SurfControl (3.8x), Check Point's 2007 acquisition of Pointsec (8.8x), or IBM's 2006 acquisition of ISS (3.2x). It looks even cheaper than acquisitions of private security companies, such as Symantec's two big acquisitions in 2008 of MessageLabs (5.0x) and Vontu (7.0x), Google's 2007 acquisition of Postini (6.9x), or Cisco's 2006 acquisition of IronPort (8.3x).