Intel to Buy McAfee for $7.68 Billion

Intel (INTC) is snapping up security giant McAfee (MFE) in a $7.68 billion deal, as the chip king now views security at nearly the same level as its strategic focus on Internet connectivity and developing more energy-efficient chips.

Under the deal, Intel will pay McAfee shareholders $48 a share in cash, a 60% premium over the stock's closing price on Wednesday.

"Everywhere we sell a microprocessor, there's an opportunity for a security software sale to go along with it," said Intel CEO Paul Otellini in a conference call with analysts. "And it's not just the opportunity to co-sell, but it's an opportunity to deeply integrate these into the architecture of our products."

When the firms merge, McAfee will become a wholly owned subsidiary of Intel's software and services group, which already has an 18-month relationship with the security giant. In fact, Intel expects to introduce a product in the early part of next year that was born out of that partnership.

"In working with them," said Otellini, "the notion of moving beyond just partnering became very, very clear. I think that the products we're coming out with in 2011 are really exciting, and they add a measure of security and goodness to the platforms we offer today."

Taking Wall Street by Surprise

Two issues led to the decision to buy McAfee, rather than continue to partner, Otellini said.

"The deeply integrated combination of hardware and software capabilities would add substantial value to our platforms and differentiation to our platforms. That was No. 1. No. 2, it became pretty clear to us that the value of that offering was fairly significant. So, it made sense from a financial perspective to have that value accrued into Intel shareholders."

Despite the previous ties with McAfee, Intel's announcement took Wall Street by surprise. Just last April, HP (HPQ) was said to be interested in McAfee. And a couple years back, Cisco (CSCO) was rumored to be eyeing McAfee as an addition to its security offerings.

However, the notion of a large hardware company hooking up with a major security player is nothing new. Consider Symantec's (SYMC) bold acquisition in 2005, when the security software giant acquired storage maker Veritas for $10.5 billion. And as far back as 2003, Cisco made its foray into security software with the acquisition of network security software maker Okena.

The Soothsayers Were Right

The Symantec-Veritas acquisition, however, made some investment bankers question whether a stand-alone security industry could survive or if it would eventually morph into other industries. With Symantec and McAfee, the two largest security software vendors, aligning with industries outside of security, it now appears the soothsayers from five years ago were right.

Intel expects the deal to close as early as the end of the year, after McAfee shareholder approval and other regulatory clearances. The transaction, excluding one-time write-downs and deferred revenue, is expected to slightly add to Intel's current earnings forecast during the first year and improve beyond that.

In early trading, McAfee shares spiked nearly 60%, while Intel moved about 3% lower.