I was mildly surprised with the Intel purchase of McAfee, which is somewhat better than being bored by the Dell/3PAR deal. At least HP has come along and made the plain girl in the corner appear more interesting. Anyway, moving on to Intel/McAfee…
Nobody refutes the fact that security is an extremely important aspect of cloud infrastructure. All the enterprise systems players take it seriously and have been building on their solutions for years. Companies like Cisco, EMC, IBM and Microsoft have spent a small fortune on both development work and acquisitions in security.
Intel is always looking for ways to add more functionality and value around their core chipsets, so security algorithms and embedded processing make sense. But these are technologies and techniques that can be either licensed (probably for no money up front and a very small royalty) or acquired through what would really be technology acquisitions that are counted in the millions of dollars rather than billions.
In fact, we’ve found little companies like Zix Corp (ZIXI) that have embedded solutions that make email and messaging in applications within healthcare and financial services secure and encrypted, all in the background and at very low cost. This type of technology is available, deployed broadly, and not expensive.
So why buy what is really a large scale consumer and enterprise business to go after a slice of the embedded infrastructure that is needed for cloud and mobile computing?
Sadly, the answer I keep bumping into is “because they can,” and a company their size “needs to do something big” so that people believe they are “serious” about the space. These are lousy reasons from an investment standpoint. Furthermore, it’s also lousy from a business standpoint. One way to show how serious you are is to deliver outstanding solutions. Intel sold their anti-virus business to Symantec over a decade ago and certainly knew about putting security primitives into the core back then, but hasn’t pursued the security market with any gusto during this time.
To be fair, Intel, after many struggles, has managed to finally integrate and embed at least some level of core networking and graphics processing into their chipsets. I’d be willing to bet that this came at horrific costs looking back 10 years but it’s there today and memories are short.
It isn’t that security integration doesn’t make sense, it’s that Intel could have done it fairly easily already and licensed or acquired key technologies along the way easily and at much lower costs. That is what adding value is all about from a management standpoint, building and buying assets that you then make into something far more valuable. In this case Intel paid the premium for McAfee shareholders and took $3B+ out of their own shareholder pockets.
The example we see pointed to most often is EMC. EMC did diversify away from a pure storage company with a steady stream of purchases including RSA, Documentum and VMWare to name three (there were many more.) But then that asks for the question “Is that Intel really going to embark on a software infrastructure strategy?” That would suggest they might be interested in companies like Akamai (AKAM), Solar Winds (SWI), Progress (PRGS), Adobe (ADBE), BMC (BMC) etc.
The good news there is that these are some of the few technology businesses that have higher gross margins than the existing Intel business. The bad news is that Intel doesn’t know anything about running a software company. They might be able to learn (so far not so good…) but if they do it’s going to cost plenty.
McAfee will be disrupted by the acquisition, as is the case 99% of the time in acquisitions like this. What happens in the wake will be telling insofar as to whether Intel management is here to build shareholder value or serve their ego and succumb to laziness by acquiring big chunks of market position without wishing to do the work to build them or even keep them. Unfortunately for them, they started out with a 15 yard penalty right at the kickoff so they have that much more work to do.
On the margin this is also good news for a recovering Symantec, which has been making progress but can certainly use a bit of wind at their back which is what this deal is likely to do – at least for the next 12-18 months.
[Disclosure: No positions although an asset management partner of R2, Aberdeen Investment Management, owns shares in Zix Corp.]