In August of 2010 Intel announced one of the most ill-advised acquisitions in IT security industry history. Intel went on to pay $7.68 billion for McAfee. At the time I was one of many who was critical of the acquisition(Intel Should Not Consummate McAfee Deal.) While Wall Street was enamored of the deal because, wow! Cyber!, there was never a fit. A company that dominates the silicon chip industry has no strategic reason to get into anti-virus, IPS, and firewalls.
Here are five good reasons for Intel to reverse the blunder of 2010.
1. Symantec is coming back. Symantec too has made its mistakes. Up until Intel acquired McAfee, Symantec held the record for blunders. It acquired a data center behemoth, Veritas for $14 billion in 2004. Only recently has Symantec decided to reverse that decision.
During the last four years Symantec has been a tad rudderless. It is too bad McAfee was no longer in a position to gain market share. That opportunity was left to the other vendors in the space, Sophos, Eset, and Trend Micro, to name three. On top of that a slew of endpoint security vendors have cropped up to address the failings of traditional signature based AV. Cylance, Bit9/CarbonBlack, CounterTack(which just announced the acquisition of Mantech’s Cyber Security products, the remnants of HBGary). Even FireEye, (the company Dave Dewalt went on to lead to an IPO after handing off McAfee to Intel) has made an endpoint security play with the acquisition of Mandiant.
One of the reasons I would attribute to McAfee having only flat revenue (as opposed to plummeting) since the acquisition is that its largest competitor, Symantec, has been stalled out itself. That is about to change. After Symantec finally spins off Veritas it is coming back with a vengeance.
2. Brand confusion. Branding is important in the security space and Intel is attempting to re-brand McAfee to “Intel Security.” It’s a great name but does nothing for the $55 billion a year Intel brand and confuses buyers of McAfee products. Regardless of the Intel acquisition, McAfee was headed towards a branding train wreck as the weirdest character in an industry known for its oddballs, John McAfee, came out of hiding from an experimental drug retreat in Belize to make a come back, first with a truly strange YouTube video, and now on the lecture circuit. This is a golden opportunity to spin off McAfee with a clean name.
3. The Internet of Things (IoT). There are only 3 billion or so PCs in the world and sales are dropping. At the same time the IoT is exploding and Intel is already seeing growth in its IoT division. That is where the opportunity for Intel lies. Dumping McAfee would allow Intel to focus its resources where it can continue to dominate.
4. Finance. Sometimes large corporations make huge bets for mysterious reasons of financial engineering. Maybe the acquired company creates an off-shore tax haven. Maybe there is a patent portfolio worth more than the operating company. After four years it is hard to come up with any financial benefit that has accrued to Intel or its shareholders from the McAfee acquisition.
The last full year that McAfee filed with the SEC it had $2.064 billion in revenue. Intel folded McAfee into its Software and Services Group (SSG) that probably had some revenue from its other products. Revenue last year for SSG was $2.216 billion, essentially flat in a market that is growing 24% according to my analysis.
If Intel had put the McAfee purchase price of $7.68 billion into an ETF based on NASDAQ it would be worth $18.6 billion today.
In its latest annual report Intel reports no adjustments for the $4 billion in goodwill it still maintains on its books for McAfee, indicating that its auditors think McAfee is still worth the purchase price. So, spinning it off may net the purchase price back. Since Wall Street is valuing other pure play security vendors at crazy multiples (Palo Alto Networks at $15 billion! That’s more than Check Point Software), today would be a good day to cash in and move on.
5. Security is changing too rapidly for a division of Intel to keep up. Even people who have been active in the industry for the last 15 years are shaking their heads over what a crazy space IT security is. There and hundreds of new startups. I recently counted 1,400 vendors and I know that is a low count. Major security vendors have to evolve and innovate constantly. They do that through investment and acquisitions. Symantec is about to get back into that game. Cisco recently increased the pace of their acquisitions. Venture backing of startups is rampant. Intel Security has dabbled in acquisitions. It purchased yet another firewall vendor, StoneSoft, in 2014, but has not demonstrated that it can counter Palo Alto, Fortinet, or Check Point, in the gateway security space. McAfee has to compete on many fronts, including the endpoint, network, and risk management and data security. NewCo Security, when it is released from the grasp of Intel will have to pick up where it left off five years ago.
