SAN FRANCISCO/NEW YORK (Reuters) - Intel Corp (INTC.O) will pay $7.7 billion for security software maker McAfee Inc MFE.N, making its largest-ever acquisition to bolster the appeal of its chips as it tries to expand from PCs into the burgeoning market for Web-connected gadgets.
Analysts say the deal, the latest in a flurry of high-premium acquisitions, could give the world’s largest chip maker a leg up as it competes against a growing field of rivals designing technology to power smartphones, tablet PCs and newfangled televisions.
It underscores how security has become a concern in a world of Web-enabled devices. Swallowing McAfee would also give Intel the ability to sell high-profit security software alongside its microprocessors to its traditional PC customers.
Intel shares closed 3.5 percent down, while McAfee shares surged 57.1 percent and helped boost the wider security sector. The shares of Symantec Corp (SYMC.O), the biggest security company, rose 6.2 percent.
“When we look several years out, almost every device in the home is likely to be connected to the Internet. Intel clearly wants to participate in that market,” said Chris Hickey, an analyst with Atlantic Equities. “By being able to differentiate with a security offering, they may well have an edge over the competition.”
The agreement is the latest in a stream of technology deals, including Dell Inc’s DELL.O $1.3 billion pact to purchase storage company 3PAR Inc (PAR.N).
Intel’s deal adds to an unusually active August for M&A. Deals worth nearly $90 billion have been announced this week alone, making it the busiest week in an August since 2006, according to Thomson Reuters data.
Intel will pay $48 per share in cash — an eye-popping 60 percent premium to McAfee’s closing price on Wednesday. Analysts and executives said the premium was in line with valuations on recent software deals.
A source close to the deal said the acquisition implied an 18-19 times forward price-earnings multiple, compared with a typical valuation in the high 20s to low 30s.
Intel dominates the market for PC microprocessors. But as consumers increasingly use handheld gadgets such as smartphones and Apple Inc’s (AAPL.O) iPad to connect to the Internet, Intel’s offerings are at a disadvantage against more power-efficient chips from rivals such as Qualcomm Inc (QCOM.O) and Texas Instruments Inc TXN.N.
Analysts say Intel could differentiate its processors by, for instance, designing processors that speed up the security scans typically performed by McAfee software, or creating technology that makes gadgets less vulnerable to attacks by hackers.
Intel “decided a combination could be very powerful for bringing enhanced security to consumers,” Renee James, who runs Intel’s software and services group, said in an interview.
“We have lots of activities going on in growing connected devices ... from connected television to mobile devices,” she said. “As we look at the businesses we’re in, we see that security is the No. 1 purchase consideration. We believe that we can enhance security with hardware and come up with a better solution.”
Intel would like “to provide some sort of hardware acceleration for virus scans, or spyware scans. And they want to deliver this type of capability across the board, from handsets and notebooks all the way up to severs across the cloud,” said Patrick Wang, an analyst with Wedbush Securities.
For the moment, the biggest advantage in the McAfee deal may be Intel’s ability to sell McAfee’s software to PC customers. Intel supplies roughly 80 percent of the microprocessors used in PCs.
Experts said the deal should not encounter resistance from antitrust authorities given the different nature of their businesses, but some said Intel’s sheer dominance of the microprocessor market could invite scrutiny.
“The government may look at whether there is a vertical relationship that could be exploited. Could Intel tie the hardware and software components together, or otherwise start insisting that its customers, computer manufacturers, also use McAfee?” said Michael Knight, an antitrust attorney at Jones Day and former Federal Trade Commission official.
McAfee, the No. 2 security software maker behind Symantec, reported revenue of $2 billion in 2009 and has been working with Intel on a variety of projects for the last 18 months. McAfee would become a wholly-owned subsidiary.
Intel has made several software acquisitions in the last few years, including the purchase in 2009 of Wind River, a company focused on mobile software.
Some analysts, including Trip Chowdhry of Global Equities Research, questioned the logic of combining a chipmaker with a software security firm.
“This is a very short-sighted acquisition because of two things: McAfee is of an older generation and their focus has been desktop security. That is their bread and butter,” Chowdhry said. “Secondly, I think if you think about desktop security, Microsoft’s essentially is a better product.”
Hewlett-Packard Co (HPQ.N) and Oracle Corp ORCL.O are also believed to be trawling for deals.
In addition to the Dell-3PAR deal, International Business Machines Corp (IBM.N) said last Friday it would buy software company Unica Corp UNCA.O for $480 million. Last month, Tyco Electronics Ltd (TEL.N) agreed to buy network equipment maker ADC Telecommunications Inc ADCT.O for $1.25 billion.
Intel expects the transaction to close once it gains shareholder approval and regulatory clearance. Executives said they hoped to close the deal by the end of the year.
“Intel has such conviction in security that it believes that, in addition to its ongoing energy efficiency performance and Internet connectivity foundations of computing, security is now a third pillar of computing and, thus, a strategic thrust,” wrote Raymond James’ Hans Mosesmann.
Reporting by Jennifer Saba, Caroline Humer, Rodrigo Campos, Elinor Comlay and Steve Eder; editing by, Matthew Lewis, Steve Orlofsky and Andre Grenon