An Analysis of the McAfee Acquisition

Ebube Anizor

Nasir Gondal

Vijay Ranganathapura

Prodip Saha

Adam Wexler

SG

MT

6050

December 6, 2010

Overview: Proceed with Caution

Valuation2

DCF valuation between $7.4B and $8.7B (including cash on hand)

Comparable transactions – $3.5B or $4.7B (Sales or NI) Comparable companies - $3.4B or $6.9B valuation (E/B or P/E) Cost synergies minimal. Future value based on new product synergies

Post-Merger Integration

4 Wholly owned subsidiary that will operate under McAfee brand Integration focused on cross-company product development and

marketing

Strategic Fit1 Growth in net-connected devices. Both lack presence in segment

Hardware-Software security / Multi-function CPU‘s growing trend Both Intel and McAfee need diversification from mature segments

Overall Deal5 Big Bet: Hardware-software security integration is competitive

advantage in maturing and emerging segments McAfee ROE & ROI is low. Poor investment unless synergies realized

Negotiation3 Offer of $7.68B in cash, appropriate for valuation

Agreement structured to lock out rival bidders – 60% premium Seemingly no concessions made by McAfee

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

$0

$50

$100

$150

$200

$250

2010 2011 2012 2013 2014 2015 2016 2017 2018

Smartphone

Notebook PC

Desktop PC

Netbook

Tablet

Server

market size growth

Strategic Fit: Shared Challenges

Mc

Afe

e S

tra

teg

y

• Three Pillar Strategy focussed on CPU:

• Internet Connectivity | Energy Efficient Performance | Security

• Trend: Multi-function CPUs / Hardware-Assisted Security

• Risk: Concentration of revenue in PC segment & dependence on few customers

• Pure-play multiplatform strategy serving

corporations and consumers

• Growing presence in mobile via acquisitions

• Risk: Loss of consumer revenue to cheaper

options

Growth: strong in mobility segment, stagnant in desktop/server, steady decline in overall market

80.7%

19%

0.3%

Intel

AMD

Via

Sources: TRENDS: Business Insights, Datamonitor, Euromonitor | MARKET SHARE: TechEye, AP, Yahoo | All figures 2009

22%

11%

7%5%4%

51%

Symantec

McAfee

Trend Micro

IBM

EMC

Others

26%

12.3%

12%

11%6%

34%

Qualcomm

Texas InstrumentsSTM

Media Tek

Infineon

Other

Mobile CPU MarketIntel Segment RevenuePC/Server CPU Market

Inte

l S

tra

teg

y

75%

18%

4% 3%PC

Data Centre

Mobile+

Others

Consumer and Corporate Security Market

• Premiums: 119% income | 64% revenue vs. deals (2006-10)

• VALUATON: $3.5 billion to $4.7 billion (Revenue vs. Net Income)

0.5, 18.4

1.2, 5.2

3.9, 33.7

1.6, -1.6

4.0, 44.3

2.4, 20.2

-5

0

5

10

15

20

25

30

35

40

45

50

0 1 2 3 4 5

Ne

t In

com

e M

ult

iple

Revenue Multiple

Weighted Avg.

Valuation: Fair Price

Dis

co

un

ted

Cash

Flo

w

Questionable Shareholder Value: Low Risk, Low Reward

Co

mp

ara

ble

C

om

pa

nie

s &

T

ran

sa

cti

on

s

• Value: no significant cost synergies, ALL value resides in

potential new product offerings and entering new segments

• VALUATION: $6.5 billion to $7.8 billion (no synergies)

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

“As-Is” Improvements Synergies Options

0%

5%

10%

15%

20%

25%

30%

WACC D/E ROE ROIC CF Margin

Competitors (Intel)

Intel

McAfee

Competitors (McAfee)

Ra

tio

s

Ta

rge

t P

ric

e

Offset

decline in

maturing

segments

with new

offerings in

mobile &

cloud

Form

hardware

partnerships

and reduce

COGS to fall

in line with

competitors

Security integrated CPU’s to

gain traction in mobile &

cloud and maintain

revenue in core

segments

$6.5B $7.8B $10.6B $14.1B

• VALUATION: $3.4 billion to $7 billion (E/B vs. P/E)

Trans.

$3.5B -$4.7B

• No recent deals of comparable size and relevance

Comp.

$3.4B-$7B

•$7B reflects earnings expectation

DCF

$6.5B to $7.8B

•More rigorous

•In line with P/E

w/o cash*

$6.5B to

$7.8B or

w/cash

$7.4B to

$8.7B

*McAfee had $893M in cash as of 12/31/09

Negotiation: High Price to Pay?

BATNA: Partner with or buy smaller pure play security

firms like AVG or Kaspersky

Deta

ils

Str

uc

ture• $7.68B in cash

• All equity / no debt on McAfee books

• No dilution of Intel shares

• Rival bidders locked out or forced to overpay

• 60% premium (McAfee shares were trading at a 12 month low)

• Based on multiples of companies or recent transactions could

arguably have negotiated a lower price

• Operations: Fully owned sub under

McAfee name due to considerable

brand equity

• Separation necessary for

access to non-Intel based

customers (perception)

• Products: All McAfee offerings to

remain

• Management: agreements to remain

for multiple years

• Integration: Value of deal lies and

shared product development

sales, and marketing groups

Intel

PC Client Data Center

EmbeddedDigital Home

Ultra-Mobility

NAND Memory

Wind River Software

Digital Health

Software and Services

McAfee

In Favor of McAfee

Market Value

Control Premium

Potential Synergies

Transaction/Integration cost

Transaction Structure

Allocation of Value

Competing bids

Stock market/economy

Develop In-house

PartnershipPurchase McAfee

De

cis

ion

De

tail

s

McAfee to operate under Software Services Group with

selective integration

Deal structured to ensure McAfee acquired

Strategy

•McAfee as independent subsidiary

• Operates under McAfee brand

•No change in business model of Intel or McAfee

Org.

Structure

•No change in organization structure at McAfee

• McAfee brought under Intel’s Software and Services Group

Product

Portfolio

•No change at McAfee, but improve-ment in Intel’s chipset by providing chip level security

Sales and Marketing

•Both parties to implement cross selling

•Intel has direct access to corporate customers

Culture & Employees

•No layoffs at Intel or McAfee –complementary business

•No change in culture at either of the company

•McAfee HQ remains same

Financial Reporting

•Centralized –Align with Intel’s reporting under Software and Services group

Human Resources

•Alignment with Intel’s practices

Integration: Focus on Product

•Tablet

•Smart-phones

•Digital Home

•Auto

•Cloud

•Enterprise

•Netbooks

•Notebooks

•Desktops

Personal Computer

Server

MobileEmbedded

McAfee offerings intersect with Intel’s entire

portfolio, initial focus should be in corporate

Inte

gra

tio

n S

eq

ue

nc

e

Integration should focus on product development and sales & marketing opportunities (primarily for Intel)

Pro

du

ct

Po

rtfo

lio

Integration for corporate server/PC where value proposition has more traction

then shift to mobile in corporate and consumer. Other segments to follow.

2013

2012

2011 Corporate & Consumer PCCorporate Server and Cloud

Corporate Mobile

Timeline intended to portray integration sequence not length/effort.

Consumer Mobile

Digital Home, Auto, etc.