Intel + McAfee = More Profits

In a surprising move chipmaker Intel (INTC) agreed to buy security software company McAfee (MFE) today. The big winner here is all of the investors in McAfee who saw the stock shoot up $17 per share. That’s a 57% gain from yesterday’s closing price. McAfee investors are getting a sweetheart of a deal. Another winner is Intel. The company is gaining access to a new area of the technology market. They are getting a solid company with a significant portion of the antivirus software and security protection market.

McAfee is well-known for its security products including VirusScan, Firewall, Intrushield, and Entercept. The company has generated nearly $2 billion dollars in sales over the past year and $173 million dollars in net income. The company earns over half a billion dollars annually in free cash flow. Earnings have increased 17.5% over the past few years. McAfee’s balance sheet is in good financial shape as well with nearly $800 million in cash and no debt.

Intel should have no problem financing the acquisition with over $18 billion dollars in cash. Intel is going to pay a total of $48 per share for the company. Arbitrage investors can make a tiny profit by buying shares at their current price of $46.98. It’s a 2% gain of $1.02 per share. That’s not a bad return for a risk free investment. While I like the acquisition for Intel, the company is overpaying for McAfee. Intel is paying nearly 19 times earnings for McAfee and almost 4 times book value.

Analysts are paying a lot of attention to the fact that the acquisition will gain access to the mobile telecommunications market via smartphones. This is important but they are overlooking how Intel can increase its products in the PC market. Intel can now bundle its chips with software protection. This will increase profits and margins in the existing PC, laptop, and tablet PC market. This differentiates Intel from AMD who has no such security offering.

Intel management needs to be given credit for doing something with the company’s large cash hoard. The company could have chosen to just sat on its cash ala Microsoft. The company is doing everything possible to achieve growth, be it organic or inorganic. Although Intel overpaid for McAfee, I am still bullish the long-term prospects of the company. Intel’s shares are a buy at below $19 per share.

Photo by: cpchannel