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Why Intel's McAfee Deal Makes Sense

Intel's $7.7 billion acquisition of McAfee may be a shock move, but it's one that could reap long-term dividends for the chipmaker.

Intel/McAfee story has been updated with additonal analyst comment and information on McAfee's financials.

SANTA CLARA, California (


) --


(INTC) - Get Intel Corporation (INTC) Report


$7.7 billion acquisition of McAfee (MFE)

isn't the deal investors expected the chipmaker to make, but it's one that will probably reap long-term dividends.

McAfee, which competes with


(SYMC) - Get Symantec Corporation Report

, gives Intel a direct route into one of the most crucial parts of the software sector. With online threats proliferating, Intel has opened up a major source of additional revenue; the deal also allows the company to position itself as more than just a chipmaker.

"As connected mobile devices become more of a part of every day life, Intel is saying, 'this is a way that we can bring hardware security into next-generation mobile devices,'" IDC analyst Crawford Del Prete told



With enterprises and consumers looking to do more complex things with technology and with the PC market facing maturation, the message is simple -- diversify or die.


This deal speaks to the convergence of numerous technologies in the enterprise environment," explained Michael Bauer, an analyst at

FBR Capital Markets

, in an note released on Thursday. "While Intel buying McAfee is not the combination that investors were expecting to wake up to today, it is a monumental deal that speaks to the value in McAfee that has been underappreciated by investors for the last year."

McAfee, which grew its revenue 20% to just under $2 billion in 2009, also gives Intel a foothold in the network security market. With smartphones and other mobile devices such as tablets becoming increasingly popular, network security will be key.

"This deal is consistent with our view of the pervasive need for security software --

it goes beyond PCs and enterprise data centers and into everyday networks and devices that are becoming increasingly extensible and therefore vulnerable," explained Brad Zelnick, an analyst at Macquarie Securities, in a note released on Thursday.

In a statement released before market open, Intel hinted that McAfee will play a crucial role in the company's ongoing push into the mobile device market.

"With the rapid expansion of growth across a vast array of Internet-connected devices, more and more of the elements of our lives have moved online," explained Intel CEO Paul Otellini. "In the past, energy-efficient performance and connectivity have defined computing requirements. Looking forward, security will join those as a third pillar of what people demand from all computing experiences."

McAfee itself recently bought mobile security specialist


, highlighting the company's desire to lock down data on mobile devices and smartphones.

McAfee, which missed Wall Street's estimates in its recent

second-quarter results

, has felt the impact of an

uncertain economy.

Set against this backdrop, the company's stock has fallen more than 26% this year, which likely prompted Intel to finally pull the trigger.

The McAfee deal, however, is not cheap, and Intel is paying $48 for each share of McAfee -- a 60% premium on the software maker's Wednesday closing price. The deal could have major implications for other security companies, according to Macquarie analyst Zelnick.

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"Given the premium paid, we expect there were likely multiple parties interested in McAfee, which further supports our positive view of security software, especially Symantec which is the most similar asset in the space," he wrote. "We expect this deal will bode well for

Check Point Software

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Blue Coat Systems





, and software overall."

While there's plenty of renewed speculation bubbling up of Symantec as the next big security acquisition by a giant like


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, the company presents challenges to these types of buyers.

"Symantec has a lot of other stuff going on; McAfee is more of a pureplay device security company," said IDC's Del Prete, noting that Symantec is a much less attractive buy. There's also Symantec's major OEM deal with HP, which could make things complicated if Dell or IBM tries to buy it.

McAfee could also place Intel in a more favorable position against its competitors, namely


(AMD) - Get Advanced Micro Devices, Inc. Report

. "Although we question the likely returns on the proposed acquisition, we believe that it can aid product differentiation to help bolster Intel's already-dominant market share," wrote Clyde Montevirgen, semiconductors analyst at Standard & Poor's Equity Research, in a note. "

McAfee could make its chips more salable in markets in which it has little penetration."

The deal is likely to pressure AMD to bolster its own product lineup -- or risk losing more market share to Intel in current markets as well as new ones (like mobile devices). Investors seemed to be following this line of thinking; AMD's stock dipped 18 cents, or 2.82%, to reach $6.39 in Thursday trading.

McAfee shares surged $17.22, or 57.53%, to $47.15 and Intel dipped 51 cents, or 2.61%, to $19.08.

-- Reported by James Rogers in New York

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