Intel Buys McAfee for $7.7 Billion in Cash

The stock market is down again today, but the big news is that Intel (INTC) is buying McAfee (MFE) for $7.7 billion in cash. In my opinion, this is an awful move. There are so many better uses for that money, like dividends, rather than an acquisition. According to Yahoo Finance, Intel has $18.3 billion in cash which translate to $3.29 per share.

The boards of both companies have unanimously approved the deal, but it’s still pending McAfee shareholder and regulatory approval. Intel said that the deal “reflects that security is now a fundamental component of online computing.” Intel went on to say that security is now just as important to the company as energy efficiency and internet connectivity.

Sure, I don’t doubt how important security is but Intel is paying a gigantic premium. The acquisition price is $48 per share which is a 60% premium over the closing price from yesterday. Think of it this way: MFE was trading at 10.5 times next year’s earnings. Now it’s trading at close to 17 times next year’s earnings.

McAfee will become a wholly owned subsidiary of Intel, and will report to its Software and Services Group. Both companies are based in Santa Clara, Calif. Founded in 1987, McAfee has some 6,100 employees, and saw $2 billion in 2009 revenue , making it the world’s largest security company.
Intel will benefit from McAfee’s entrenched position in the security field, and McAfee may be able to optimize its notoriously performance-hungry software now that it’s a part of the company that provides the CPUs to many computers.
Intel recently announced its best quarter ever with $2.9 billion in profit, thanks to an influx of delayed computer purchases by businesses.

Despite all press a mega-deal gets, they rarely work out. At best, they’re a wash. At worst, both firms are hurt. The problem is that deals often look good on paper, but the actual merging of two companies is very hard. There are two cultures, two ways of doing things and two histories. That isn’t given up so easily.
What it comes down to is that I think executives like to lead large organizations. They see “large size” as translating to “good for shareholders.”
I think smaller “fold-in” mergers can work very well, but beyond a certain size, you’re asking for trouble. The frustrating part is that Intel looked so attractive here with lots of cash and a low valuation.

Posted by on August 19th, 2010 at 11:39 am


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