Analysts: McAfee fits into Intel's future

On the surface, Intel's intention to acquire security specialist McAfee for $7.68 billion may seem like a stretch. But is a good fit for the world's largest chipmaker in a highly connected and increasingly security-conscious market, according to some leading industry analysts.

Intel said on Thursday it has entered into a definitive agreement to buy all of McAfee's common stock. McAfee, a security software company, will operate as a wholly owned subsidiary, reporting into Intel's Software and Services Group.

Worldwide security software revenue is forecast to surpass $16.5 billion in 2010, an 11.3 percent increase from 2009 revenue of $14.8 billion, according to a Gartner report on Monday. The consumer security software market remains the largest security software segment, with 2010 revenue projected to reach $4.2 billion in 2010, up from $3.9 billion in 2009, Gartner said.

The acquisition "augments" Intel's mobile wireless strategy by focusing more on security, and CEO Paul Otellini said that this will become a "third pillar" of the computing experiences, in addition to performance and connectivity.

"As the world of connected computing continues to grow, we are adding security as one of the major focus areas for Intel," Renee James, Intel senior vice president, said in a video posted on Intel's Web site. "Connected devices are exploding," Dave DeWalt, president and CEO of McAfee, said in the same video. "As the movement of the Internet changes from IPv4 to IPv6 (Internet Protocol version 6) we're going to trillions of devices over time, and security is a really important part of that."

Ashok Kumar, an analyst and managing director at Rodman & Renshaw, said the acquisition has to be seen in the light of Intel's recent antitrust woes.

"Given antitrust issues, the target universe is significantly restricted," he said. "It's an expensive way to get some expertise, but if you look long enough, some of these security features will get embedded in (Intel's) hardware," he said.

"I think security is a checklist for any computer access device. It's not one specific platform. To the extent that they can offer this as a feature embedded in the chip...where security algorithms are embedded in the chip, that's an advantage. Almost similar to what's happening in the graphics chip market (where Intel now includes that as part of the main processor or CPU), it becomes embedded in the CPU itself," Kumar said.

"I don't think they're getting outside their core competency. They're trying to enhance to their core portfolio...they're not trying to become a software company," he said.

Nathan Brookwood, the principal analyst at Insight 64, is more cautious but sees it as strategic, nevertheless, in a world where computer viruses are more pervasive than ever. "Some of the more pernicious viruses out there start to do their evil work while you're booting (starting) your system, so if the chip was smart enough to be able to detect certain virus behaviors, that might be able to give you an advantage," Brookwood said.

"It's going to take years, but Intel does work with very long time frames. One thing you have to give them credit for: they do take a long view," he added.

Brookwood is cautious, however, saying hardware and software companies are not always a good marriage. "The idea of hardware and software guys getting together so that they can change the chips to optimize for various applications is one that companies have pursued for a long time. I'm still somewhat skeptical that there's a lot to be gained through ownership that can't be gained through close collaboration."

And how does this compare to last year's $884 million buyout of Wind River Systems, another software company? "Wind River was selling (software) development tools. Wind River sells to engineers the way that Intel sells to engineers. McAfee sells more to end users," Brookwood said. "But McAfee obviously is a successful company with a large customer base. Intel needs new opportunities to augment its growth."