Intel plans to buy security company McAfee for $7.68 billion--the biggest acquisition in its 42-year history.
The chipmaker said Thursday it has entered into a definitive agreement to buy all of McAfee's common stock at $48 per share in cash. McAfee's stock closed Wednesday at $29.93, making Intel's offer a 60 percent premium.
The boards of both companies have approved the deal.
Security has become an essential element of online computing, on par with energy-efficient performance and connectivity, Intel said. But today's security isn't adequately addressing the array of new Net-connected machines on the market, such as mobile devices, TVs, cars, ATMs, and medical gadgets, according to Intel. Offering protection requires a new approach that can tie together software, hardware, and services, the company said.
"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," Intel CEO Paul Otellini said in a statement. "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."
By integrating McAfee's core technology, Intel asserts that it can improve current products and offer new ones that can better secure both the cloud and devices used by consumers and businesses. Those include traditional computers and embedded products--any device where chips play a prominent role.
"Our view is that everywhere we sell a microprocessor, there is an opportunity to sell security software with it," Otellini said in a conference call.
The chipmaker also sees the acquisition as augmenting its wireless strategy.
"Hardware-enhanced security will lead to breakthroughs in effectively countering the increasingly sophisticated threats of today and tomorrow," Renee James, Intel senior vice president, said in a statement. "This acquisition is consistent with our software and services strategy to deliver an outstanding computing experience in fast-growing business areas, especially around the move to wireless mobility."
The number of connected devices is expected to grow from around 1 billion today to 50 billion in another 10 years, according to McAfee CEO Dave DeWalt. This growth will reshape opportunities in communications and commerce, he said in a video presentation, but cybercriminals and cyberterrorists will also take advantage of the Net's open architecture, putting users at risk and jeopardizing the future of the Internet. Tackling next-generation cybersecurity is a key reason and motivation for Intel and McAfee to join forces, DeWalt said.
The merger stems in part from projects that Intel and McAfee have already been working on together. The two companies have been collaborating for the past 18 months on ways to improve security, James noted in the conference call.
"After working alongside each other and recognizing that we share a common vision for improving security, it made good sense that we take this step," James said.
The first product resulting from the team-up will be released in early 2011, James said, though she didn't reveal any details.
The deal also continues Intel's strategy of growing its business by using software to enhance its hardware, added James, citing the company's 2009 acquisition of Wind River Systems as just one example.
The deal is expected to close following McAfee shareholder approval and regulatory clearances, which Intel is hoping will occur before year's end. Once the acquisition is finalized, McAfee will operate as a wholly owned subsidiary, tied to Intel's Software and Services Group.
Intel noted the McAfee management team has promised to stay on for many years after the acquisition closes. Intel also said it's committed to the McAfee brand and all McAfee products.
In initial trading Thursday, McAfee stock was surging toward Intel's offer price, up about 57 percent to around $47.16, while Intel's own shares were trending down about 3 percent to the vicinity of $18.90. Intel said it expects the integration of McAfee to slightly dilute earnings during the first year of combined operations due to merger-related costs but then have little effect in the second year.
Although Intel is paying a 60 percent premium for McAfee over the stock's closing price from Wednesday, Intel noted the premium is in the range of recent large software and security transactions and is reasonable given McAfee's growth and profitability and the added value that Intel and McAfee can create together.
The Intel acquisition of McAfee illustrates the trend of security proliferating through all the layers of technology, said IDC analyst Chris Christiansen.
"I think this is a dramatic acceleration in the previous trend of security going from boxes to board to chips," he said. "Intel can bring economies of scale and advanced chip management to McAfee, and McAfee has technology in messaging, Web, encryption and DLP, areas that Intel can use in a variety of ways. It represents a shift in the security market of security into systems, chip and storage management and other disciplines."
The news also makes Christiansen wonder whether Symantec might not be next as an acquisition target.
"We are going to see more and more security companies absorbed into system management," he said, noting that "Microsoft consolidated security into its system management division."
The McAfee acquisition fits nicely with Intel's purchase last year of Wind River, McAfee Chief Technology Officer George Kurtz noted. Intel bought the maker of embedded-systems software for $884 million.
"Given the current challenges in dealing with the proliferation of virulent malware, bringing software closer to silicon will provide a real advantage for consumers and businesses. Beating back the tide of malware proliferation by changing the game on the bad guys is an exciting proposition," Kurtz said in a blog post.
"McAfee's strategy of protecting the multitude of devices such as ATMs, printers, digital copiers, and cars fits with helping organizations better manage and protect the IP enabled mobile and embedded devices that run Wind River embedded and mobile software," Kurtz said. "This also dovetails nicely with McAfee's acquisition of Solidcore, a leader in dynamic whitelisting technology that already provides protection for millions of embedded devices."
Intel had already announced an acquisition this week, saying it plans to buy Texas Instruments' cable modem unit to broaden the markets for its Atom processor line.
Here is a video from Intel about the McAfee acquisition:
Updated at 6:45 a.m., 7:35 a.m., 8:15 a.m., and 9:15 a.m. PDT with more details. CNET's Elinor Mills contributed to this report..