DEALTALK-McAfee buy may trigger more tech security M&A

Thu Aug 19, 2010 6:24pm EDT

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* Competitors could look to counter Intel's move

* Security software key part of integrated offering

* Intel deal could push up premiums for other deals

* Deal helps make busiest M&A week in Aug. since '06

By Bill Rigby and Paritosh Bansal

SEATTLE/NEW YORK, Aug 19 (Reuters) - Intel Corp's (INTC.O) surprise $7.7 billion bid for McAfee Inc MFE.N may trigger more deals as competitors scramble for a piece of the rapidly growing software security sector.

Technology giants Oracle Corp ORCL.O, Hewlett-Packard Co (HPQ.N), IBM Corp (IBM.N) and EMC Corp (EMC.N) -- which are all looking to expand the "stack" of hardware and software they offer corporate clients -- could move to counter Intel's emergence.

That puts the spotlight on the world's biggest software security company, Symantec Corp (SYMC.O), and a number of smaller companies such as Checkpoint Systems Inc (CKP.N), Sourcefire Inc FIRE.O, Websense Inc WBSN.O and SafeNet.

"We're in the early stages of a major consolidation in software, particularly in security," said FBR Capital Markets analyst Daniel Ives. "This deal speaks to the convergence of hardware and software, which is becoming increasingly more important as the industry consolidates."

The larger tech companies are all moving towards offering big-spending corporate clients an integrated range of products and services to help them manage networks and data. Security is now a critical part of that offering, making expert providers attractive targets.

The push to diversify has triggered a wave of consolidation in the tech sector. Earlier this month, Dell Inc DELL.O agreed to buy data storage company 3PAR Inc (PAR.N) for $1.15 billion. Last month SAP AG (SAPG.DE) bought Sybase for $5.8 billion and Hewlett-Packard bought smartphone-maker Palm for $1.2 billion.

Symantec itself has been on the acquisition trail. In June, it bought PGP Corporation and GuardianEdge, two privately held companies focusing on email and data encryption, for an undisclosed sum. This month, it closed its deal to buy Verisign Inc's (VRSN.O) payment authentication unit for about $1.3 billion.

Symantec shares jumped 6.2 percent on Thursday, giving it a market value of around $10 billion.

Intel's deal for McAfee adds to what is turning into an unusually active August for M&A activity. Deals worth nearly $90 billion have been announced this week alone, making it the largest week since August of 2006, according to Thomson Reuters data.

LIKELY ACQUIRERS

Serial acquirer Oracle, the business software maker that branched out into hardware with its purchase of Sun Microsystems in January, may feel forced to match Intel's move.

"Oracle almost has all the pieces for an integrated stack, but is basically relying on somebody else to secure its offering," said Richard Williams, an analyst at Cross Research, who has a "buy" rating on Symantec. "That leads me to think that Oracle at some point will try and take out Symantec."

Oracle, which has spent more than $42 billion to buy some 60 companies over the past seven years, declined comment.

Hewlett-Packard, the world's biggest PC maker, is also a potential big acquirer in the sector.

Only this week it bought Fortify Software, which sells compliance and anti-attack software to companies, for an undisclosed sum. Hewlett-Packard, which is looking for a chief executive after the acrimonious departure of Mark Hurd earlier this month, declined comment.

IBM, which said in May it budgeted some $20 billion for mergers and acquisitions through 2015, could also be a buyer. It was not immediately available for comment.

"I do think that these other companies will take a serious look at whether they need to do an acquisition or not," said Steve Sonne, an M&A partner at law firm O'Melveny & Myers.

RICH PREMIUMS

Microsoft Corp (MSFT.O), the world's biggest software maker, can never be ruled out as an acquirer, but it already has a range of security products such as Forefront for business customers and Security Essentials for home users. It declined to comment on plans to acquire in the sector.

Software deals draw price-to-earnings (PE) multiples in the high 20s to low 30s, said a source close to the McAfee deal.

Intel paid a forward PE multiple of 18 to 19 times for McAfee, which was trading around 11 times PE after a couple of rough quarters, said the source, who spoke on condition of anonymity because he was not authorized to talk to the media.

At $48 per share, McAfee shareholders got a 60 percent premium to Wednesday's closing price.

That follows a slew of other rich premiums in recent technology sector deals, such as the 56 percent premium that German software maker SAP paid for Sybase and an 87 percent premium that Dell is paying for 3PAR.

Sellers are likely to seize on that number in the future.

"Other sellers will try to use that as a benchmark to try to get a higher premium," Sonne said. "If somebody else gets offered a 20 percent premium, I am sure that the seller will say: 'But McAfee just got 60.'" (Additional reporting by Gabriel Madway, Jennifer Saba and Ritsuko Ando; editing by Andre Grenon)

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