Justin Sullivan
Over the past 18 months, Intel engineers have been working closely with McAfee technicians on a new product that hasn't yet seen the light of day - an Intel silicon chip with McAfee's prized security software already integrated into its circuitry.
The companies, which are located blocks away from each other in Santa Clara, Calif., have worked together for years. But they had never before collaborated on a physical product, according to an Intel spokesman.
As it turns out, Intel liked working with McAfee so much that it decided to buy the software security specialist in a blockbuster $7.68-billion (U.S.) acquisition, announced Thursday.
The purchase is an expensive bet by Intel that security will become paramount in the emerging post-PC world known as the "Internet of Things." In this world, fridges, cars and crucial public infrastructure such as hydroelectric dams and hospital equipment will have computer processors that are connected wirelessly to the Internet.
"Security gets more important when it's not just PCs," said Duncan Stewart, a technology analyst in Toronto with the consulting firm Deloitte. "I don't want my mobile X-ray machine being hacked."
Analysts, though, remain unconvinced that the deal will position either company for the next era of computing, given Intel's spotty track record of integrating software purchases and the cold reality that neither company is a leader in the wireless world.
Mr. Stewart worries the deal might simply be the sandwiching of two successful firms to no obvious benefit. "What was wrong with the status quo?" he asks. "I didn't see a big, gaping hole."
The companies, though, pointed to the growing importance of security in a wireless world. "Connected devices are exploding," Dave DeWalt, McAfee's president and chief executive officer, said in a video posted to the Intel website. "And security is really important as a part of that."
Intel's bid of $48 a share, which is still subject to regulatory and shareholder approvals, represents a 60 per cent premium over McAfee's $29.93 closing stock price on Wednesday and sent McAfee stock soaring on Thursday.
Intel, a global tech giant that brought in about $31.5-billion in net revenue last year, has long ruled the market for computer chips. But it has largely been frozen out of the market for mobile devices by other chip makers, such as ARM Holdings PLC, which makes products popular with smart phone manufacturers.
"We're just beginning to target [the mobile]market and we do have a little ways to go," said Bill Kircos, an Intel spokesman. "When we invented our Atom chip two years ago, we got more than 4,000 design inquiries - from fishing companies, car makers, obviously phones, TVs, even a sewing machine company."
The acquisition of McAfee, Mr. Kircos adds, was in part a nod to the growing importance of cloud computing, in which data are hosted on an external network that can be tapped into by remote devices. In such an environment, with companies storing vital data off site, security becomes crucial.
McAfee's lucrative enterprise and consumer services should also provide Intel with a diversified source of subscriber-based revenue.
But Forrester Research analyst Andrew Jaquith worries that the trend is for manufacturers such as Apple Inc. and Research In Motion Ltd. to embed security features into operating systems and products without relying on third-party security or hardware suppliers.
Both Intel and McAfee have been making acquisitions with the post-PC world in mind. Intel acquired Sarvega, a software company that Mr. Jaquith said Intel then managed into irrelevance. Last year, McAfee acquired Solidcore Systems Inc., which makes security for point-of-sale debit machines.
"They were kind of moving together," Mr. Jaquith said. "But I would argue you could have done this without merger activity."