Manish Shah is the former president of Midwest Law Printing in Chicago. He also worked at Intel, PwC and Motorola. He has an MBA from Kellogg Graduate School of Management, and a MS in Computer Science from Illinois Institute of Technology. He can be reached at firstname.lastname@example.org.
By Manish Shah
Intel’s acquired McAfee for $7.68 billion by paying a hefty 60 present premium. According to Bloomberg, the 171 acquisitions in the Internet security business in last five years have averaged a premium of 22.3 percent. Also, Intel is paying 3.29 times McAfee’s revenue, which is significantly higher than a five-year median of 2.07 times revenue.
Most analysts are baffled by this move because, Intel, which is a pure hardware firm, is now moving into the security software industry. At the first glance, there are no synergies between Intel and McAfee. Their products are different and so are their markets and their customers. Integrating the two diverse firms culturally and technologically will be a steep challenge.
Intel’s CEO Paul Otellini has a different perspective. He believes that this acquisition will solidify Intel’s position in the mobile security arena. Gene Hodges, a former president at McAfee, is bullish about the short-term pros-pects of this deal. He believes that Intel will be able to leverage its relationships with the PC makers and drive the sales of McAfee security software higher. However, he is skeptical about Intel’s ability to build security capabilities into mobile device chips. This market, unlike the PC microprocessor market, is extremely fragmented and so Intel does not have a scale advantage. In addition, Hodges believes that the security threats to mobile devices will not be handled by the software or the hardware in the device but will be handled remotely in the computing cloud.
According to the latest data, Dell has $10.9 billion in cash on hand, Hewlett-Packard, $14.2 billion, Intel, $18.3 billion, Cisco, $39.1 billion and Microsoft $36.7 billion. This “dumb” cash could trigger a host of acquisitions that may not be strategic for these companies. History is full of examples of failed mega mergers and acquisitions such as Daimler’s acquisition of Chrysler and AOL’s acquisition of Time Warner. If the CEOs of these cash-rich companies do not find a prudent use for this cash, they should return it to the shareholders in form of a dividend.