Intel’s $7.68B announced acquisition of McAfee raised more that a few eyebrows, both in the marketplace and on Wall Street. Does it make sense? It’s hard to say at this point. So much depends upon execution, as well as potential synergies seen by Intel’s management which may not be obvious to outsiders.
The price is almost 4X McAfee’s most recent annual revenue. That’s very, very pricey in almost everyone’s view. I’ve read a number of columns by others which analyze this deal from various viewpoints.
Let’s look at several potential rationales for this deal:
Diversification into software and services
Intel can’t grow in PC semiconductors forever, and is very dependent on the semi business, which can be quite cyclical. Theoretically, attempting to grow by increasing software and services as a percentage of the business makes a lot of sense. But Intel hasn’t been very successful in the past in this very endeavor, which I’ll discuss more below.
Intel’s management has provided justification for this deal by talking about embedding security into its chips, as well as valuing highly McAfee’s embryonic security efforts in mobile devices and the cloud. I think these all have strategic merit–but are they worth anywhere near $7.68B?
While overlapping functions can lead to cost savings in many acquisitions, there are probably not a lot of costs to be taken out in this one. McAfee is a big company, in a different business than Intel’s core business. Sure, there may be some common functions like HR and finance that can be combined to some extent, but I don’t see cost savings to a material degree here.
Use of cash flow
Intel generates a LOT of cash. They are one of the most successful tech companies of all times, and their PC processor business is nearly a monopoly, with terrific margins. So the cash is available, and it doesn’t make much sense to have it sitting in the bank earning 1%. THAT will kill your return on assets metric! It needs to be reinvested, or retuned to the shareholders…
On the surface, buying a big software company could be a good growth strategy for Intel. Assuming as there is a good return on investment, then why not? It’s going to be hard for Intel to grow much farther in processors. About the only area big enough to make a big difference in their processor business is in mobile. This is a very competitive arena which they’ve failed miserably in to date.
So that’s some of the reasons you might use to do a deal like this–but is that reality?
The real reason deals like this happen
CASH: The biggest reason that this type of deal happens is because it can. In this particular case, tech companies like Intel want to be seen as growth companies. It seems to kill tech companies to pay their cash flow out in dividends. But once your company gets to a certain size, it’s hard to be a growth company. A lot of bad acquisitions happen in the process of trying to continue growth status past a reasonable point. But is this the best return on assets, or use of cash flow, for the stockholders?
Why there is a good chance this acquisition won’t succeed
PRICE: Intel paid dearly for a very established security software player. They paid for the McAfee brand–but will they keep investing in it in the long run? History says that this business will eventually morph into “McAfee by Intel” and they “Intel Security Software”, if the business stays with Intel in the long run. Built into the price was also a large number of retail customers, a dealer and distribution network — but does Intel really want these things? If not, why pay for all of them?
TECHNOLOGY: Listening to Intel, this seems to be a technology play–but McAfee is universally not considered to have the best technology in the space. They win to a great extent on brand and sheer market presence at this point–like many large companies. Since the price paid was very high–why not buy a smaller player with much better technology to integrate with silicon–for much less?
CULTURAL FIT: Semiconductors and software are very different businesses. I’ve spent a lot of time in both. I have always said that the “Common Business Sense” that a management team falls back on when stressed, is a real problem when they are making decisions in an unfamiliar business. It doesn’t seem like brain surgery to manage a software business with a semi background, but there are subtle differences that tend to have massive consequences. Intel has bought a number of software businesses in the past–how many of them can you name? There is a reason for this, they tend to disappear in the large semiconductor bureaucracy and eventually wither away.
Typical M&A ISSUES: Key McAfee personnel will have a tendency to “cash out” and leave after the acquisition. This is a normal issue in M&A, and when the acquirer is in a different space, this can be a particular problem. Possibly the fact that McAfee is already a large public company may reduce this issue. But if the real assets of a software company (the people) walk out the door, there isn’t much left for your $7.68B.
In summary, I view this as a very questionable move by Intel. Intel has some very smart folks in management. Maybe they have some great strategic and tactical plans in mind, but if so, they’re keeping it all to themselves. For the stated reasons of embedding security in chips, mobile security and the cloud, they could have bought 2-3 innovative security software companies with bleeding edge technology–for a fraction of the price they’ll pay for McAfee. If this acquisition is to pay off, Intel will need to figure out how to leverage the McAfee brand, consumer franchise and distribution channels. I just don’t see this happening in the long run–I hope for Intel shareholders sake I’m wrong. Acquisitions are an area with room for a variety of opinions–what do you think?
Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at firstname.lastname@example.org
Dan Kuehler says
McAfee offers smartphone security software, through the recent acquisitions of Trust Digital and TenCube. Clearly, Intel wants a piece of the pie. Intel also just acquired Texas Instruments’ cable modem product line for similar reasons.
But as I said in the article, Dan—the price!
Darshana Bhatt says
My question is how is the deal valuation fixed at 4X that of McAfee current revenue? Who has arrived at this valuation and what is their justification? This is especially in context of a recent bid for buying a company at $10million when the company’s revenue itself was $100 million – contrary to the Intel case… What is the logic and reasoning to this kind of absurd over or under valuation? Please share your thoughts.
Darshana, you raise an interesting question and one that people have written books on. But there are some short answers as well. The shortest answer is that a company is worth what someone is willing to pay for it. What this means is that if there is more than one potential buyer an auction ensues and the price can go way up. Financial buyers are often focused on multiples of EBITDA and so on, while strategic buyers like Intel are very interested in how the acquisition will “fit” with their business plan going forward. Often strategic buyers will pay a higher price as a result, because they believe it will add value to their business by adding a technology, team, time-to-market or some other attribute they deem important. While there is no “normal” prices for software companies, a range of 1-3X of revenues for a solid small software company is typical. Great performers can get far more, and a distressed company far less. Larger companies like McAfee are more normally valued as a multiple of EBITDA. Hope this helps.
Darshana Bhatt says
Thanks for your response Morettini…however I think there is more than meets the eye. Having seen a few of these acquisitions, I am convinced this could pan out to be like the real estate bubble where builders, lenders, brokers, realtors, media and investors were all in cohorts to cook something and present it as something else….ofcourse the argument they gave then was “demand is higher than supply” and hence the prices are so high. Now we know why the prices were inflated…. and who made the money in the process while who lost. The shareholders are the ones losing out here too in many cases due to decisions that may be questionable. I am not referring to the Intel-McAfee case in particular here but to the whole business of acquisitions in general where valuations far exceed the projected revenue. Hype is something that can be created artificially when in reality there may not be commensurate value addition. Point is we need to closely watch thepost acquisition performance roadmap and question the decision makers when anomalies are observed.