Thursday, August 19, 2010

Intel Is Desperate for Growth

By Eric Jackson, Senior Contributor08/19/10 - 10:54 AM EDT

Stock quotes in this article:INTC, MFE, SYMC, MSFT, ORCL,GOOG

This morning's announcement that Intel(INTC) will purchaseMcAfee(MFE) for $48 -- a 60% premium over yesterday's close -- is a bit of a head-scratcher.

It's hard to understand the logic for why a chip company needs to own a pure-play software company protecting PCs from viruses. There has been speculation before about which companies eventually might swoop in and buy either McAfee or Symantec(SYMC), but it was usually other big software companies -- names like Microsoft(MSFT), IBM(IBM), orOracle(ORCL) were commonly mentioned. Even Google(GOOG) has been mentioned as they have tried to build up their Google Apps offering to more seriously compete against Microsoft.

To my knowledge, no one has ever mentioned Intel before as a potential buyer.

So, why are they doing it?

1. They have the cash. In their most recent quarter, they had more than $18 billion in cash burning a hole in their jeans. And, remember, this is atech company that's paying a decent forward dividend yield north of 3%.

2. They want to show more growth. This is likely more important in the eyes of Intel. This big-chip company's future success as a stock is based on its ability to continue to grow its top-line. With the PC market potentially set to take a pause, Intel's growth story is imperiled. Therefore, why not grab a high-margin software business that's running in a duopoly to pad the numbers.

I don't think it makes much strategic sense. It's likely that McAfee will be a bolt-on acquisition, where the stand-alone subsidiary continues to operate as it did as a stand-alone business with very little synergies with their new parent.

In fact, we might want to pencil in to our calendars five years from now, when Intel will likely spin-out the former McAfee division to "increase shareholder value."

So, this purchase is about Intel's desperation. But, more important in my eyes, is how this move might signal that many of those other large companies mentioned above might also start to act/react in the same way to the same problem.

We've talked about the living dead tech companies that are small and have no future without getting bought. We've also talked about all the cash the biggest companies have been stock-piling over the past couple of years. Yet, there hasn't yet been a big M&A consolidation.

We thought Oracle was going to lead the charge, but even they have cooled off of late. We could finally be ready to see some moves -- and they could be big and stupid moves like Intel's today.


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