Intel (INTC) has long been known as a dominate hardware producer, with market share for its processors dwarfing that of the competition.  It has become such a behemoth in that industry that some analyst’s have been able to have tunnel vision about what Intel does.  So, it came as a bit of a surprise to many this morning when Intel announced they would acquire security software maker McAfee (MFE) for $7.68 billion.  This is by far Intel’s largest acquisition in many years and is a sign that the company is not content to rest on its chip-making laurels.  Clearly this move marks a shift in the company’s strategic vision as they seek to secure the growing number of internet capable devices that consumers interact with daily from a surge in cyber threats.

We think this deal makes a lot of sense, especially the way that Intel is packaging it.  Without a doubt, McAfee already has a decent business as it is most well known for its antivirus products, and their software products come with healthy gross margins.  However, McAfee and Intel know that the best way to see explosive growth is through the new generation of internet enabled devices.  Just how big is the market potential?  If you were to ask IMS Research they believe the number of devices connected to the internet will reach 22 billion in just ten years!  The number of internet enabled phones has already surpassed the number of internet enabled computers, and their estimates also include connectivity for things not commonly thought of as internet-connected like cars and televisions.

With McAfee providing the know-how on security software combined with the considerable resources of Intel, it has real potential to drive the company’s growth going forward.  Intel has an extremely strong balance sheet with around $11B in cash and equivalents (after paying $7.68 billion in cash for McAfee) and a very manageable debt load.  This flexibility will allow them a leg up in developing software for mobile devices and other internet connected devices.

The deal was unanimously approved by the boards of both companies helped by the 60% premium paid compared to yesterday’s close.  Now, the deal will come down to regulatory approval and a shareholder vote both are customary and we expect both to clear with relatively little trouble. 

As of this week, we had Fairly Valued or neutral stances on both Intel and McAfee, and will likely maintain those going into next week.  We will be very interested to see if Intel will begin to integrate security enhancements into its hardware or if they will leave the McAfee division as a solely software product.  Powering and protecting computers (in a general sense) is a business we do not see slowing down anytime soon.  There is no doubt that Intel has taken a major step towards growth continued growth with this deal, and if the stock falls much further we sense a buying opportunity.