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Intel Acquisition of McAfee Deal Evaluation

SMGT 6050: Mergers, Acquisitions & Strategic Alliances

Adam Wexler Ebube Anizor Nasir Zulfeqar Gondal Prodip Saha Vijay Ranganathapura

12/6/2010

1 / Table of Contents

TABLE OF CONTENTS

Table of Contents ....................................................................................................................................................... 1

Executive Summary .................................................................................................................................................... 2

Introduction and Strategic Overview ......................................................................................................................... 3

Strategic Analysis ................................................................................................................................................................ 3

Valuation .................................................................................................................................................................... 7

Valuation 1: Comparable Companies ................................................................................................................................. 7

Valuation 2: Comparable Transactions ............................................................................................................................... 7

Valuation 3: Discounted Cash Flow ..................................................................................................................................... 9

Valuation Summary ........................................................................................................................................................... 11

Negotiations ............................................................................................................................................................. 12

Details................................................................................................................................................................................ 12

Overall Assessment ........................................................................................................................................................... 15

Integration ............................................................................................................................................................... 16

Strategy ............................................................................................................................................................................. 16

Product Portfolio ............................................................................................................................................................... 17

Management ..................................................................................................................................................................... 18

Operations ........................................................................................................................................................................ 18

Sales and Marketing .......................................................................................................................................................... 19

Timeline ............................................................................................................................................................................. 19

Alternatives and Conclusion .................................................................................................................................... 20

Make or Buy ...................................................................................................................................................................... 20

Conclusion and Recommendation .................................................................................................................................... 21

Appendix A: Forecasts, Trends and Ratios ............................................................................................................... 23

Device Market Forecasts ................................................................................................................................................... 23

Appendix B: Valuation Using Comparable Companies ............................................................................................ 28

Appendix C: Valuation Using Comparable Transactions .......................................................................................... 29

Other Deals ....................................................................................................................................................................... 29

Appendix D: Valuation Using Discounted Cash Flows ............................................................................................. 30

Base Case (“As Is”) Cash Flow ........................................................................................................................................... 30

Sensitivity Analysis ............................................................................................................................................................ 34

Valuation Including Improvements ................................................................................................................................... 35

Valuation including Intel Synergies and Future options ................................................................................................... 36

References ............................................................................................................................................................... 37

2 Executive Summary

EXECUTIVE SUMMARY

Our evaluation found that the McAfee acquisition is in line with Intel’s strategy to acquire firms that can take advantage of Intel’s great silicon-based technology and strong market position. Intel and McAfee complement each other in an environment where the significant growth of net-connected devices and related security threats give hardware-integrated security and Intel a strategic advantage worth several billion dollars.

Our valuation was consistent with the $7.7 billion offer currently awaiting regulatory and McAfee shareholder approval, even though it represents a high share premium and is larger than comparable deals. Using a weighted average of comparable transactions, our valuation was $3.5 billion based on revenues and $4.7 billion on net income. Using comparable companies, a value of $3.4 billion was derived on a market/book basis and $7 billion on P/E. The DCF valuation is where we have proven the most accurate appraisal lies, as much of the value of this deal is in the potential revenue and future options synergies. On an As-Is basis, McAfee is valued at $6.5 billion, whereas the Improvements, Synergies and Future Options were valued at $7.8 billion, $10.6 billion and $14.1 billion. respectively. Because there are no cost-synergies a final valuation incorporating any revenue synergies would be inappropriate. Consequently the suggested negotiated price should be under $7.8 billion.

Given that the average premium for security firms acquisition was 38% of stock, we concluded Intel could have paid 50% and still received a lock out as opposed to the 60% premium and saved $600 million. Moreover, given current market conditions, in particular McAfee shares being at a twelve month low, a more attractive price could have likely been negotiated and more risk of failure shared with McAfee.

Integrating McAfee with Intel Product Development and Sales and Marketing will be key to unlocking synergies ahead of expectations. As McAfee’s products intersect with most lines of Intel’s business, product development from the ground up must be started quickly and leverage the companies’ existing relationship and familiarity with each other. Also, because both companies’ products are used by PC manufacturers, Sales and Marketing efforts can be streamlined and bargaining power increased. McAfee will provide Intel access to a broader base of corporate customers who appreciate the value proposition and are more likely to purchase a “bundled” product as performance and security in the enterprise, mobile and cloud domains increase in importance.

The long-term potential of this deal may in fact represent a move to strengthen Intel’s processor business as opposed to a move to diversify away from it. The acquisition reflects that security is now a fundamental component of online computing. Today’s security approach does not fully address the billions of new Internet-ready devices, as well as the accompanying surge in cyber threats. The strategic partnership has laid the ground for what we believe will be a smooth integration, especially given McAfee’s relative autonomy. We do believe, however, that Intel could have been more aggressive in its negotiations and shared some of the risk of failure. Notwithstanding, the negotiated price was appropriate for the valuation. That being said, integrating security with the CPU represents a large bet and unless the noted synergies are realized by Intel, its shareholders will not receive an acceptable return on its investment.

3 Introduction and Strategic Overview

INTRODUCTION AND STRATEGIC OVERVIEW

On August 19, 2010, Intel Corporation (Intel), the world’s largest computer chip-manufacturer,

announced that it had entered into a definitive agreement to acquire antivirus and security software

maker McAfee, Inc. (McAfee) for USD$7.68 billion in cash1, or $48 per share. This price represented 60%

premium on the closing share price for McAfee on the day. The deal was approved by the board of

directors of both companies, and will be finalized after shareholder approval and regulatory clearance

in the first quarter of 2011. Under the deal, McAfee will operate as a wholly-owned subsidiary, and

report to Intel’s Software and Services Group.2 Prior to its announcement, the companies had been

working collaboratively for nearly 18 months, and Intel expects the technology acquired from the

acquisition to be integrated into its chipsets in early 2011.3

This report will analyze the strategic rationale behind the deal, provide an overview of the

valuation of McAfee, review the negotiation strategy for the companies, and then recommend how

Intel can best realize the synergies from this deal by successfully integrating McAfee’s operations.

STRATEGIC ANALYSIS

Company Backgrounds

McAfee, founded in 1987, had revenues of $1.93 billion in 2009, with a net income of $173.42 million.

McAfee’s business involves developing, marketing, distributing and supporting computer security

software for large enterprises, governments, small and medium-sized businesses and consumers

either directly or through a network of distribution partners. The company has two revenues sources:

(i) service, support and subscription for security software, and (ii) product, which includes revenue

from perpetual licenses (those with a one-time license fee) and from hardware product sales. In 2009,

service, support and subscription revenue accounted for 90% of net revenue and product revenue

accounted for the balance4. The company employs about 6,100 people and its major competitors are:

Symantec Corp, Kaspersky Lab ZAO, Trend Micro, and Cisco Systems.

Intel, founded in 1968, had revenues of $35.13 billion and net income of $4.37 billion in 2009.

The company designs and manufactures microprocessors, motherboards, and semiconductor

components that are used in computers, servers, and networking and communication products. Intel

1 All financial figures presented will be in US dollars 2 Intel Corporation (2010). Intel to Acquire McAfee. Retrieved from http://newsroom.intel.com/community/intel_newsroom/blog/2010/08/19/intel-to-acquire-mcafee 3 Network World (2010). Intel drawn to vibrant security software market. Retrieved form 4 McAfee Inc (2010). 2009 Annual Report. Retrieved from http://investor.mcafee.com/annuals.cfm


is the world's largest supplier of microprocessors, with a 2009 market share of 80.7% in the PC/Server

segment. Its major competitor Advanced Micro Devices (AMD) had a microprocessor market share of

19%.5 The company employs about 80,000 people and has operations across North America, Latin

America, Asia Pacific, Europe, Middle East and Africa6.

Rationale for Intel

The major strategic reasons for Intel’s acquisition of McAfee are the rapid rise of mobile computing,

an increase in security spending, and the emerging trend of hardware-assisted security.

Rapid Rise of Mobile Computing

Intel has traditionally been the dominant player in the microprocessor market for desktop and

notebook computers. However, desktop and notebook PC have reached the maturity phase of the

business cycle. Instead the use of computing power is shifting towards mobile communication

devices, including smartphones, tablets and netbooks (See Figure 1 below, and Figures A1 and A2 in

Appendix A).

Figure 1: Forecast Global Device Market Size (source: Business Insights, Datamonitor, Euromonitor)

According to Gartner, mobile phones will overtake PCs as the most common method of accessing the

Internet by 2013. Additionally, the number of smartphones shipped worldwide will equal the

shipments of notebooks and desktop by 2013, and surpass that mark the following year (See Figure

A1a in Appendix A). The same survey shows that “over 3 billion of the world's adult population will be

able to transact electronically via mobile or Internet technology”. This trend in the ubiquity of the

5 PCWorld (2010). AMD Takes Processor Market Share From Intel, IDC Says. Retrieved from http://www.pcworld.com/article/187671/amd_takes_processor_market_share_from_intel_idc_says.html 6 MarketLine (2010). Retrieved from http://www.marketlineinfo.com/library/DisplayContent.aspx?R=E82C088A-0488-4DB5-8953-9E316C2B44D1&N=4294834270


Internet and shift in computer power from PC’s to mobile devices puts the long-term growth of Intel

under threat for two key reasons:

1. No Mobile Presence: Although Intel has consistently owned 80% of the PC/Server CPU

market at has no presence in the Mobile CPU market (See Figures A4a and A4b in Appendix A).

The respective markets are worth $25 billion and $23 billion globally. This reality could be

changed with Intel’s pending purchase of Infineon, and its 5.5% market share, in 2011.

2. Concentration of Revenue: 75% of Intel Revenue is derived from the PC segment; and of

those revenues, nearly 40% is from Dell and HP.7

As a result, there is a need to diversify Intel’s business from a chip-maker to one that provides a full

platform solution (hardware, software and services). With the power of current processors already at a

sufficient level for most users, the strategic focus for Intel has shifted form increasing processing

powers to more towards providing chipset technologies catering to mobile computing and Internet

connectivity. As a result, security has become a priority for Intel – a third pillar of Intel’s strategy in

emerging segments8. Thus the acquisition of McAfee represents an opportunity for Intel to gain a

foothold in the growing security market in the mobile computing segment.

Increase in Security Spending

Spending on security by consumers and enterprises is likely to grow, driven by a growing number of

threats from malware and viruses, new devices, regulatory requirements, and increasingly

sophisticated hackers and cyber-criminals (see Figure A3b in Appendix A). According to Gartner, the

market for security software is expected to reach $41 billion by 20149 . The acquisition of McAfee will

allow Intel to diversify its revenues by tapping into this growing security market. As an indication of

the robust nature of security spending, McAfee’s revenue in the corporate sector grew dramatically

through the recession: 25% in 2008 and 26% in 2009. The consumer sector grew at 18% and 12%

respectively (see Figure D2 in Appendix D).

Hardware-Assisted Security

Intel also has the opportunity to integrate McAfee's security software into its PC, server and mobile

chips. Not only is spending on security likely to grow, there is merit in combining silicon and software

7 Intel 2009 Annual Report 8 Intel Coporation (2010). Intel to Acquire McAfee. Retrieved form http://newsroom.intel.com/community/intel_newsroom/blog/2010/08/19/intel-to-acquire-mcafee 9 Gartner (2010). Forecast: Security Service Markets, Worldwide, 2009-2014.


capabilities to create a truly differentiated product. Although many security features can be

implemented entirely in software, hardware-assisted solutions have the potential to offer better

performance and additional features over software-only solutions10. This is especially true in mobile

devices where performance (i.e. user experience) and battery life are priorities. One possible

architecture for integrating hardware and software is through using a dual processor model. A second

processor could independently maintain an updated version of all known security threats and assist

the main processor in identifying threats when they occur. The tight coupling of hardware with real-

time updated versions of security software should result in better performance and easier

manageability of the security software11. This security integration will allow Intel to differentiate its

chips from its main competitor, AMD, who is coupling graphics and processing power to gain share.

Rationale for McAfee

McAfee is not immune to the earlier noted decline in PC sales. McAfee has traditionally generated 40%

of its revenue from consumers. This revenue is put at risk as growth in the PC market declines and

consumers continue to opt for cheaper or free security solutions.

By becoming a part of Intel, McAfee can enhance its brand value, and leverage the financial

resources of Intel and compete more effectively against its main competitor Symantec. According to

its 2009 Annual Report, one of the strategic priorities of McAfee was to "pursue new solution

opportunities that build upon our multi-platform strategy of PCs, cloud, internet and mobile

security"12. In line with this strategy, in 2009, McAfee acquired MX Logic, provider of cloud-based

email and Web security, for $140 million13. The acquisition was intended to enhance cloud-computing

security capability for McAfee. Thus McAfee’s strategy is also to capitalize on the growing need for

security in the mobile computing market (also evident by its acquisition of Trust Digital, the provider

of smartphone security software, in May 201014). By combining its security solution with Intel chipsets

in mobile devices, McAfee can also tap into revenues streams from Internet and mobile security.

McAfee can also leverage processor level security by integrating its software into the market-leading

Intel chipsets and, hence, gain sustainable competitive advantage over its rivals.

10 Thompson Research. Credit Suisse investor report: McAfee complements x86. 11 Yahoo! Finance. Intel and McAfee: Annuity Models, Mobile Security and the Elephant in the Room. Retrieved from http://finance.yahoo.com/news/Intel-and-McAfee-Annuity-indie-2889376917.html?x=0&.v=1 12 McAfee Inc(2010). Annual Report. Retrieved from http://files.shareholder.com/downloads/MFE/1077637405x0x363412/C7FDC5BE-D33F-4FAD-9AC2-D5F257ED50BE/2009_10K_AR_Feb26_2010.pdf 13 McAfee Corp (2009). McAfee acquires MX Logic. Retrieved from http://www.mcafee.com/us/about/corporate/mcafee_mxlogic.html 14 McAfee Inc. McAfee acquires Trust Digital. Retrieved from http://www.mcafee.com/us/about/corporate/mcafee_trustdigital.html

7 Valuation

VALUATION

Three methods were used ascertain an appropriate valuation for McAfee: comparable companies,

comparable transactions, and discounted cash flow. The relevant assumptions used in the valuation

are detailed below and in the accompanying appendices.

VALUATION 1: COMPARABLE COMPANIES

In using the comparable companies’ valuation methodology, three firms in particular exhibit lines of

business very similar to that of McAfee: Trend Micro, Check Point and Symantec. However, when

assessing the market/sales, market/book, and market/net income of the companies, not all ratios

landed within an acceptable range to make a comparison meaningful (see Table 1 below and Table

B1 in Appendix B).

Trend Micro Check Point Symantec

Market/Sales 5.15 7.70 2.32

Market/Book 26.99 3.53 3.05

Market/Net Income (P/E) 28.13 19.90 19.44

Table 1: Comparable Company Ratios

As can be seen in Table 1, there is a large range in the market/sales ratios across all companies and

market/book and p/e ratios for Trend Micro. For this reason, only the market/book and p/e ratios for

Check Point and Symantec were used to form a valuation. The average multiple for the former equals

3.29x while the latter is 19.67x. When applied to McAfee’s 2009 year end financials, the resulting

valuation is $7 billion (based on book value of equity) and $3.4 billion (based on net income).

VALUATION 2: COMPARABLE TRANSACTIONS

The use of the comparable transactions valuation method considered computer hardware companies

that engaged in M&A activity with security software providers. The basis upon which the multiples

were derived involved looking at both trailing twelve month revenues and net income of the target

companies. The logic behind this is that depending on whether one is the buyer or target, the use of

either measure of wealth can have different advantages. A multiple derived from net income can be

considerably more than that from revenues, providing obvious advantages for the target. Furthermore,

only deals with values in excess of $750 million were considered so as not to skew the results and to

provide the best comparison to the Intel-McAfee deal. See Table C1 and Figure C1 in Appendix C.

8 Valuation

IBM’s acquisition of Internet Security Systems (ISS) and Symantec’s acquisition of Verisign were

the most relevant deals of publicly traded companies to that of Intel and McAfee. Because in the Intel

case a hardware company is buying a software security provider, whereas with Symantec it was the

opposite, the IBM merger was given the most weight as it bears the closest resemblance to Intel-

McAfee. The IBM deal was weighed at 0.5 and generated a multiple based on revenues of 3.94x or

33.73x based on net income. The acquisition by Symantec, however, is given a weight of 0.3 and

resulted in a multiple based on revenues of 1.24x or 5.21x based on net income.

In order to give a wider range to the sample size, two general hardware and software

transactions have been included in the valuation: Oracles acquisition of Sun and HPs acquisition of

Palm. However, due to their indirect resemblance to the Intel-McAfee transaction, they have only

been given a weight of 0.1 each. Notwithstanding, Oracle paid 0.53x revenues, or 18.36x net income

for Sun Microsystems. HP, meanwhile, paid 1.6x revenues or -1.6x net income.

Taking into account the comparable transactions referenced above, the weighted average

revenue multiple is 2.44x while the weighted average net income multiple is 20.22x (see Figure 3).

McAfee’s 12 month trailing revenues leading up to the August 19, 2010 acquisition were

approximately $1.93 billion, while its net income was $173.42 million. Using the weighted average

multiples, a total value using the comparable transactions approach of either $4.7 billion (based on

revenues) or $3.5 billion (based on net income) was determined. This approach suggests that Intel

paid a premium of either 64% or 119% based upon the comparable transactions method.

Figure 3: Comparable Transaction Ratios

9 Valuation

VALUATION 3: DISCOUNTED CASH FLOW

Given the multitude of variables affecting McAfee’s performance as both an independent firm and a

merged entity using a Discounted Cash Flow (DCF) allows for a more granular and accurate approach

to valuating the firm. Of particular note is the need to model the varying growth rates in the

segments in which McAfee operates (e.g. PC, server, mobile, etc.) and its combined effect on McAfee

revenue over the evaluation period. Consequently the DCF model used is a 9 year projection to

better account for the maturing of the traditional segments and growth of the emerging. Figure 4

summarizes the findings. Full details of the valuation and its variations are provided in Appendix D.

Figure 4: DCF Valuations

Base Case

The Base Case (or As-Is) valuation incorporates several key parameters such as a short, mid, and long-

term revenue growth rates, WACC, and several costs as a percentage of sales as detailed in Table D1.

McAfee revenue has been growing at double-digit rates since 2006 (averaging 18.4%) and was

strongest during the recession of 2008-2009 (see Figure D1). In forecasting growth from 2010

forward more modest rates, ranging from 4.8% to 8.9%, were incorporated under the assumptions

that McAfee’s super growth is not sustainable and the decline in PC sales will not be fully offset by the

growth in mobile or other “net-connected” devices on a dollar basis. More details are provided in

Revenue Growth Projection (2010-2018) in Appendix D. McAfee’s valuation under the Base Case

scenario as presented in Figure D4 is $6.5 billion.

Key Factors

A sensitivity analysis (Figure D5) was performed on the Base Case was to determine what factors most

effected McAfee’s valuation. The analysis revealed that McAfee’s valuation was most influenced by

lowering COGS, slowing SG&A growth, and reducing net working capital and WACC. As would be

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

“As-Is” Improvements Synergies Options

Offset decline in maturing

segments with new

offerings inmobile & 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 coresegments

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

10 Valuation

expected adjusting the long term growth rate was also a significant lever given its impact on terminal

value. Short–term growth rates, mid-term growth rates and CAPEX only moderately affected the

valuation price. These key factors formed the basis of determining how McAfee could independently

make improvements and where Intel could benefit from synergies.

McAfee Improvements

With the above in mind, actions that McAfee could undertake to improve mid-term (2014-2018)

revenue growth and costs have been identified to improve its valuation by $1.3 billion to $7.8 billion.

More specifically, introducing mobile security software offerings to the consumer segment and

partnering with hardware manufacturers in the PC/Server segment could improve revenue 2 percent

or $462 million in present dollars. On the cost side, reducing its COGS to be more in line with that of

its top competitors15 generates a present value of $818 million. See Table D6 for details.

Synergies and Future Options

While acquiring McAfee is deemed as a strategic and complementary business there are no overlaps

in the separate businesses that could produce any near or mid-term costs synergies. As such any

synergies that McAfee would generate would be based on opportunities created for Intel in the

growth segments and protection of revenue in mature segments. Table D7 outlines the details of the

projected synergies McAfee could provide. First, with Intel’s pending entry into the Mobile CPU

market with the purchase of Infineon, it instantly gets a 5.5% (or $1.3 billion) stake. With McAfee’s

security integration, Intel differentiates itself from competitors and could conservatively increase its

share by 1% in this growing, but currently fragmented, market (see Figure A4b). Secondly, McAfee

has proven its ability to grow revenue in difficult times and with Intel’s market power, McAfee’s long

term growth could reasonably be expected to grow slightly above the estimated 3.3% GDP rate to 4%.

Combined these synergies raise the valuation by $2.8 billion above “Improvements” to $10.6 billion.

Synergies generated from future options include a more aggressive growth in the mobile

space (taking Intel’s share to 7.5%) and stabilizing McAfee’s SG&A growth rate – taking advantage of

some cost synergies with Intel in the long term. In aggregate these options are valued at $3.4 billion.

Future options estimates are admittedly less reliable and are speculative in nature. Nonetheless these

options bump McAfee’s valuation to $14.1 billion. See Table D8 for details.

15 McAfee’s SG&A and Net Working Capital costs are already in line with competitors, so improvements were not factored in these areas were not included in its valuation.

11 Valuation

VALUATION SUMMARY

The valuation of McAfee using comparable transactions produces a valuation range that, even at the

top end, is not aligned with other results (see Table 2). This method is generally very useful because it

uses actual executed transactions in the market to estimate future deals. However, most of the deals

in the security space were relatively small in magnitude or private in nature (See Table C1). The deals

that were used in the analysis (see Figure 3) did vary in similarity to Intel-McAfee, and thus had to be

weighed accordingly. But the reality is, this proposed acquisition is nearly unprecedented in the

security software space. Given these challenges, the relatively low valuation can be discarded as

providing little insight, but perhaps a floor, to a potential value for McAfee.

The comparable companies approach likely represents a more accurate valuation than the

comparable transactions. Both Trend Micro and Check Point are comparable to McAfee in terms of

age, similarity of products and relevance given recent trends in the market place. However the

method produced valuations that differed from each other by 100%. Because the valuation produced

using the p/e multiple reflects what investors are willing to pay for future earnings, the $7 billion

dollar figure is deemed to provide the most insight to pricing McAfee.

Because no apparent cost synergies were found in the analysis, a valuation that accounts for

the synergies in the DCF are to be discarded in the negotiations because of their speculative nature.

Consequently a valuation that accounts for McAfee As-Is and with Improvements is appropriate.

Therefore a negotiated deal, with a final price not exceeding $7.8 billion is recommended.

Valuation Method Valuation (billions)

Comparable Companies $3.4 to $7 Comparable Transactions $3.5 to $4.7

Discounted Cash Flow (without synergies) $7.8 Discounted Cash Flow (with synergies) $14.1

Table 2: Valuation Methods Summary

12 Negotiations

NEGOTIATIONS

In light of the fact that a negotiated deal has been already been accepted by the respective boards and

is pending shareholder and regulatory approval, the following analyzes several aspects of the

negotiation context and outcome in retrospect and provides an assessment of the results.

DETAILS

Market Values

McAfee had been trading at a yearly low for almost 3 months prior to the acquisition announcement.

Since the announcement of the deal, McAfee stock has been selling at a significant premium (as is the

norm for target firms). This could signal that the market is very confident in the ability of Intel to

keep McAfee profitable post merger or that Intel had overpaid to the delight of its shareholders. At

an offer price of $48 per share, Intel was paying a 60 percent premium on McAfee’s share price of $30

on August 19. As shown in Figure 5 the McAfee’s share price reflected this valuation almost

immediately and has since remained at that level.

Figure 5: McAfee Share Price – Six Months (Source: Yahoo)

McAfee’s share value had been trending lower due to its announcement on April 30, 2010 that it is

expecting a “weaker-than-expected” outlook in IT spending.16 This caused a selling spree that also

brought down Intel’s price by 2 percent. Given overall trends, Intel had the opportunity to purchase

McAfee at a lower price while still lining up with a fair valuation.

16 “Tech Stocks Slip As McAfee Shares Fall”. http://ca.advfn.com/news_TECH-STOCKS-Tech-Stocks-Slip-As-McAfee-Shares-Fall_42613941.html.

13 Negotiations

Intel also had troubles of its own starting in August. There were concerns that IT spending

would slow in the near future and as is typical with acquiring firms, Intel’s stock continued to trend

downward as a result of the McAfee announcement (see Figure 6). Intel’s stock has since recovered to

its pre-announcement price as the investor community has shown confidence that the IT industry may

soon be on the upswing.

Figure 6: Intel Share Price – Six Months (Source: Yahoo)

The confidence in Intel’s, and subsequent rise in share price, is likely from two possible scenarios.

One scenario is that investors are starting to believe in the possible synergies. The second scenario is

that with Intel being such a large company, an all-cash transaction of $7.68 billion will not hinder Intel

given its 2009 net income of $10.57 billion. If the latter is true, investors may be rewarding Intel for

making a bold move and signalling that the technology industry is in now in recovery.

Control Premium

McAfee was a likely target for acquisition due to its high growth through the recession and

comparatively low share price. Potential acquirers were Dell and HP - as part of their continued

diversification away from the PC industry – and IBM. Given its current investment in the strategic

partnership, Intel had to re-orient its relationship to that of an acquirer and would likely have to pay a

control premium to lock out competitors (and ensure that any other bidders would overpay should

Intel not win)17. This reality is reflected in the premium baked into the accepted offer.

17 “Intel, McAfee, and Matching Rights” http://lawprofessors.typepad.com/mergers/2010/08/intel-mcafee-and-matching-rights.html

http://lawprofessors.typepad.com/mergers/2010/08/intel-mcafee-and-matching-rights.html

14 Negotiations

Transaction and Integration Costs

Potential integration costs would be minimized because of the moderate change to the

organizational structure as McAfee will be given relatively full autonomy to operate with a reporting

channel to Intel open via the Software and Services division. The staff will essentially remain the

same except where overhead can be reduced by sharing supporting activities like finance and IT in

the long term.

Because McAfee will continue to operate under its brand and was not required to shelve any

products under the agreement any loss of customers that is typical of acquisitions is minimized.

Allocation of Value

The fact that McAfee’s stock skyrocketed after the deal was announced suggests that McAfee is taking

a significant part of the value. However, this is partly neutralized by an all cash acquisition. The gain

by McAfee is a onetime transfer of value and Intel will benefit from all future value added with no

dilution to their shareholders. McAfee is in a high growth field with zero debt on their books. This

makes it easier for Intel to recover its investment.

Value of Synergies

Intel is most certainly a strategic buyer in this scenario as there is no operational overlap or

competition with McAfee. For Intel, McAfee supports the third pillar, security, in its overall business

strategy. As presented in the DCF valuation above, the synergies and future options relative to this

deal are revenue based, and reflect an unproven proposition that hardware accelerated security is

valuable to the market. For reasons stated earlier these synergies should not be a component of the

negotiated acquisition price.

Competing Bids

McAfee is at a disadvantage by not having a bidding war. Bidding wars generally drive the price

higher and transfers more value of the M&A process to McAfee as the seller. However, Intel is paying

a high premium for the deal to be exclusive – so the end result is effectively the same.

Prevailing Stock Market/Economic Conditions

The market and economic conditions at the time of the announcement reflect uncertainty. The

economy was (and still is) showing very small signs of recovery with a potential for a dip back into

recession. This is generally reflected by the large cash balance corporations are currently holding and

overall reluctance to make large investments. In fact, Intel’s deal announcement served as almost a

15 Negotiations

bellwether for M&A activities. Shortly after the McAfee announcement other major players like Dell

displayed confidence in the market and started a bidding war with HP for 3PAR, a data storage firm.

OVERALL ASSESSMENT

With all of the above taken into consideration, Intel could have bid for a lower price. The economy

was weak, McAfee’s shares were performing poorly, and the general consensus was that IT spending

would continue to be slow. The average premium for security firm acquisitions over the past 10

years was 38%18; Intel could have paid 50% premium and still received lock-out privileges. This would

have amounted to a $45 per share offering and $7.2 billion overall deal – a savings of $600 million.

As point of reference, HP was able to pay only a 24% stock price premium for 3PAR.

Sharing of Risks

With the earlier noted benefits of an all cash deal notwithstanding, a partial equity based deal could

help to incent McAfee to ensure continued strong performance. Overall there appears to be little to

no concessions made by McAfee or great disruptions to their business – so Intel and its shareholders

bare the majority of risk.

Figure 7 summarizes the findings of the negotiation from the perspective of McAfee. Highlighted are

the aspects of the deal that were in McAfee’s favour (and conversely, in Intel’s favour).

In Favour of McAfee

Market Value

Control Premium

Transaction/Integration Cost

Transaction Structure

Allocation of Value

Potential Synergies

Competing Bids

Stock Market/Economy

Figure 7: Negotiation Results (from perspective of McAfee)

18 “HP Shows Proclivity for High Premiums With ArcSight”, http://www.businessweek.com/news/2010-09-15/hp-shows-proclivity-for-high-premiums-with-arcsight.html.

16 Integration

INTEGRATION

By revenue, Intel is nearly 18 times the size of McAfee so integration needs to be focussed on Intel

realizing the revenue synergies earlier noted and valued between $3 billion and $6 billion and future

opportunities provided by broadening Intel’s access to McAfee’s corporate customers.

STRATEGY

Considering the outcry from investors and analysts about possible merger proposition of two

different industries leading to the disruption of business and operations, Intel’s management has

strategically chosen to operate McAfee as a wholly owned subsidiary of Intel, reporting into its

Software and Services Group (SSG) (see Figure 9). McAfee will maintain its primary operations in

North America and continue to operate under its brand. McAfee will still be headquartered in Santa

Clara, California (under a mile from Intel) and continue to employ 6,100 personnel. 19 Intel will

maintain its primary operations in Taiwan, China, and the US. It will be headquartered in Santa Clara,

California and retain all current 79,800 employees.20 With the addition of McAfee, revenue for Intel’s

Software and Services group will more than double to $3 billion (based on 2009 figures) and both the

companies are going to operate without any significant change in their business model.

Intel’s focus will remain on developing advanced integrated digital technology products,

primarily integrated circuits, for computing and communications industries. The company can

leverage its new acquisition to launch new products and to reach a broader customer base. McAfee

will continue to engage in developing, marketing, distributing and supporting computer and network

security solutions for large enterprises, governments, small and medium-sized businesses and

consumers, as well as resellers and distributors.21 Since both companies have reached the mature

phase in their business cycle, Intel’s investment in McAfee diversifies its revenue stream and mutually

leverages the customer base to increase sales by cross selling. Since there are no significant cost

synergies, all value resides in potential new product offerings and entering new segments.

19 http://www.marketlineinfo.com.ezproxy.library.yorku.ca/library/DisplayContent.aspx?R=6A6B0B0C-E672-4A27-8525-08752E646A77&N=4294839237&selectedChapter=IDAJDAKB#IDAJDAKB 20 IBID 21 IBID

17 Integration

PRODUCT PORTFOLIO

Intel’s acquisitions of McAfee Inc. will enhance the company’s ability to deliver products that offer

more effectively counter the increasingly sophisticated security attacks happening on a broad range

of Internet-connected devices.22

McAfee has a suite of software-related security solutions, including end-point and networking

products and services that help in protecting internet-connected devices and networks from

malicious content, phony requests and unsecured transactions and communications. McAfee's

products include McAfee Total Protection, McAfee Antivirus, McAfee Internet Security, McAfee Firewall,

McAfee IPS as well as an expanding line of products targeting mobile devices. The acquisition of

McAfee enables Intel to offer antivirus and anti-spam software across a multitude of platforms.23

McAfee with the support of Intel will undertake organic growth initiatives and further expand

its reach and market position in the coming years.24 As an example, in partnership with Intel, the

company's Endpoint Encryption for PC product incorporates unique functionality taking advantage of

Intel's AES-NI technology in their new Westmere chipset to provide increased, high-speed security

capabilities. 25

Figure 8: Intersection of Product Portfolios

22 http://newsroom.intel.com/community/intel_newsroom/blog/2010/09/13/intel-innovating-to-deliver-seamless-experiences-across-smart-connected-devices 23 Marketline, IBID 24 IBID 24 Wilson, D, (August 10, 2010), http://www.bestsyndication.com/?q=20100810_stock_market_today_intel_amd_share_price.htm 25 Marketline, IBID

•Tablet

•Smart-phones

•Digital Home

•Auto

•Cloud

•Enterprise

•Netbooks

•Notebooks

•Desktops

Personal Computer

Server

MobileEmbedded

18 Integration

MANAGEMENT

SSG operates in more than 20 countries, and is headed by Renee James. Ms. James is the Senior Vice

President and General Manager, Software and Services Group at Intel. She is the Chairman of two Intel

subsidiaries: Wind River Systems and Havok. Ms. James enjoys the ardent support of internal staff and

leadership along with full support of McAfee CEO David DeWalt, who will now be reporting to her.

All senior McAfee managers have committed to staying with Intel-McAfee post-acquisition,

helping to ensure a successful integration.

Figure 9: Organization Structure

OPERATIONS

Since McAfee and Intel will operate independently, there is no significant change in organization

structure other than McAfee being brought under Intel’s SSG. There exist opportunities for both

parties in sales and marketing to leverage the combined customer base from cross-selling. Since both

firms operate primarily in US and there are no layoffs, there will be neither disruption of operations

nor any culture bash. All financial reporting will be centralized and will align with Intel, reporting into

SSG. McAfee’s employees will be brought under Intel’s HR practices.

Intel

PC Client Data Center

Embedded Digital Home

Ultra-Mobility

NAND Memory

Wind River Software

Digital Health

Software and Services

McAfee

19 Integration

SALES AND MARKETING

Intel primarily sells to PC manufacturers. McAfee uses the same manufacturers as a sales channel to

consumers via pre-installed security software. The combined company increases it bargaining power.

More importantly, McAfee provides Intel access to a broader base of corporate customers. In the

mobile and cloud segments a bundled offering is even more valuable, as security increases in

importance and performance/power efficiency remains integral.

TIMELINE

Intel’s early focus should be on corporate customers in the server and PC segments. This is because

these customers’ have shown an increase willingness to pay for security (even through the recession)

and the Intel-McAfee proposition will be of more value to them. Secondly, a strong push has to follow

in the consumer and corporate mobile space because the value-proposition will be harder to sell (see

Figure 10).

Figure 10: Broad Timeline

20 Alternatives and Conclusion

ALTERNATIVES AND CONCLUSION

BATNA

Intel’s primary aim was to get a strong position in the security market and to re-invigorate the IT

industry. Intel’s fortune depends on people believing that the IT industry is going strong and in new

purchasing in IT (hardware and software). Should the McAfee acquisition not close Intel could seek

other large players like Avast, AVG and Kaspersky who provide multi-platform products. Considering

the premiums that Intel is willing to pay, most of these firms would have a difficult time turning Intel’s

offer down considering their smaller market share. However, Intel should go for the largest

competitor of McAfee that is available for sale. The argument being, that the larger the firm the

harder it is for that company to lose money even if it had poor management in place. Buying only

the best and largest in the field has always been Intel’s strategy.

Alternatively Intel could continue with the strategic partnership and release its slated

combined product offerings to the market. This will allow for customer and investor reaction to

dictate the appropriate next steps. This may of course, lead to greater interest in McAfee and raise its

price, but it also reduces the risk of acquiring without market acceptance. This could be structured in

a semi-binding deal that is triggered based on customer and market acceptance.

MAKE OR BUY

One of the arguments against the deal is the make vs. buy choice; meaning that Intel could have just

licensed security technology, instead of spending over $7 billion to buy McAfee. However, Intel has

previously failed to benefit from similar arrangement in the virtualization (a technique allows

operating system and software to run across different machines) space. Although virtualization

capability was built in the processor, software makers such VMWare, were able to gain most of the

benefits of virtualization by creating software products 26 . Incorporating hardware-assisted

functionality for security based on licensed technology entails similar risks; thus it makes sense for

Intel to own the security software to fully benefit from both hardware and software capabilities of the

processor – and the acquisition of McAfee allows that to happen.

26 Thompson Research. Credit Suisse investor report: McAfee complements x86. Retrieved from http://research.thomsonib.com/gaportal/ga.asp


CONCLUSION AND RECOMMENDATION

The acquisition of McAfee is consistent with Intel’s strategy to move into non-PC-computing, and

builds on its acquisition of Wind River, the company that makes operating systems for mobile phones

and in-car entertainment systems. In summary the benefits of the deal are:

Security Spending: corporate spending on security grew at McAfee 25% during the recession

and research indicates that spending will increase

Growth of Enterprise Mobile: while much of the attention is given to consumer mobile the

projected growth in the enterprise mobile space is similarly attractive. Furthermore, security is

an inherently greater concern for corporations, so the Intel-McAfee value proposition will have

greater traction for enterprise customers

Differentiation: Chip differentiation via software integration for Intel is important especially in

the mobile/embedded space where performance and battery life is key to adoption

Customer Access: Intel now gains direct access to McAfee’s corporate customers should it

want to further diversify its product offering

Revenue Growth and Diversification: The Mobile CPU market is nearing the size of the PC

CPU market. The McAfee acquisition represents substantial revenue growth opportunities in

this space as earlier noted.

The valuation was consistent with the $7.6 billion offer currently awaiting regulatory and McAfee

shareholder approval, even though it represents a high share premium and is larger than comparable

deals. Using comparable transactions, firm value ranged between $3.5 billion and $4.7 billion,

providing a floor on the final valuation. Using comparable companies, firm values ranging between

$3.4 billion and $7 billion were generated. With the latter being based on p/e and providing insight

into a final valuation. The DCF valuation appraised McAfee as high as $7.8 billion with improvements

and $14.1 billion with future options. Because there are no cost-synergies a final valuation

incorporating any revenue synergies would be inappropriate. Consequently the suggested negotiated

price should be under $7.8 billion.

Given current market conditions, in particular McAfee share’s being at a twelve month low, a

more attractive price could have likely been negotiated and more risk of failure shared with McAfee.

With the average premium for security firm acquisition being 38%, even if Intel paid a 50% premium

on McAfee shares $600 million would have been saved.


Integrating McAfee with Intel Product Development and Sales and Marketing will be key to

unlocking synergies ahead of expectations. As McAfee’s products intersect with most lines of Intel’s

business, product development from the ground up must be started quickly and leverage the

companies’ existing relationship and familiarity with each other.

While McAfee has been a historical low risk company (as measured by its BETA, lack of long

term debt and lower than industry WACC) it has underperformed both its competitors and Intel on

invested cash and equity return (see Figure A7). Should the acquisition not realize any synergies and

the investment is evaluated from an ROI or ROE perspective Intel shareholders will clearly not have

received value.

23 Appendix A: Forecasts, Trends and Ratios

APPENDIX A: FORECASTS, TRENDS AND RATIOS

DEVICE MARKET FORECASTS

Figure A1a: Forecasted Global Device Shipments, millions (source: Business Insights, IT Jungle, IDC Gartner)

Figure A1b: Forecasted Global Device Shipments (source: Business Insights, IT Jungle, IDC Gartner)

0

200

400

600

800

1,000

1,200

1,400

1,600

2010 2011 2012 2013 2014 2015 2016 2017 2018

Un

its

Ship

pe

d (

mill

ion

s)

Enterprise Server

Tablet

Netbook

Desktop PC

Notebook PC

Smartphone


Figure A2: Forecast Global Device Market Size, billions (source: Business Insights, Datamonitor, Euromonitor)

Figure A3a: Internet Traffic Growth (Source: Cisco)

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2009 2010 2011 2012 2013 2014

Traf

fic

(PB

)

Mobile Data

Managed IP

Internet


Figure A3b: Count of Unique Malware in McAfee Labs Database (Source: McAfee)

Figure A4a: Market Share in Desktop, Notebook and Server CPU Market, August 2010 (Source: TechEye)

Intel, 80.7%

AMD, 19.0%

Via, 0.3%

Market Size: $24.7B (2009)


Figure A4b: Market Share Mobile CPU Market, 2009 Figures (Source: Yahoo, AP)

Note: in August 2010, Intel made a $1.4 billion offer for Infineon. Expected to close in Q1 2011.

Figure A5: Intel Revenue by Segment, 2009 Figures (Source: Intel)

Qualcomm, 25.7%

Texas Instruments, 12

.3%

STM, 12.0%Media Tek, 10.9%

Infineon, 5.5%

Other, 34%

Market Size: $23.2B

PC, 75%

Data Centre, 18%

Mobile+, 4% Others, 3%

2009 Revenue: $35.1B


Figure A6: Market Share in Global Consumer and Corporate Security Market, 2008 Figures (Source: Gartner)

Figure A7: Intel, McAfee and Competitor Risk/Reward Ratios, 2009 (Source: WikiWealth.com)

Symantec, 22.0%

McAfee, 10.9%

Trend Micro, 7.0%

IBM, 5.1%

EMC, 4.0%

Others, 50.9%

Market Size: $13.5B

WACC D/E ROE ROIC CFM

Competitors (Intel) 11% 30% 8% 8% 4%

Intel 11% 2% 9% 5% 11%

McAfee 8.2% 0% 2% 4% 18%

Competitors (McAfee) 11% 11% 4% 8% 13%

0%

5%

10%

15%

20%

25%

30%

35%

28 Appendix B: Valuation Using Comparable Companies

APPENDIX B: VALUATION USING COMPARABLE COMPANIES

Trend Micro Check Point Symantec Avg. Avg. McAfee Valuation

market/sales 5.15 7.70 2.32 5.06

market/book 26.99 3.53 3.05 11.19 3.29 $6,968,701,288

market/net income (P/E)

28.13 19.90 19.44 22.49 19.67 $3,411,494,963

revenue $1,036,682,960 $924,417,000 $5,985,000,000

book value $197,833,360 $2,015,856,000 $4,548,000,000

net income $189,784,880 $357,523,000 $714,000,000

stock close on Dec. 31 2009

38.06 $33.88 $17.89

shares outstanding

140,293,004 210,000,000 776,000,000

Figure B1: Comparable Companies

29 Appendix C: Valuation Using Comparable Transactions

APPENDIX C: VALUATION USING COMPARABLE TRANSACTIONS

Figure C1: Comparable Transactions

OTHER DEALS

Acquirer

Target Deal Size Announcement/ Close Date

Notes

HP Fortify N/A Aug. 2010 private

Verisign Guardent $140M Dec .2003 Too small

IBM Ounce Labs Inc. $25M July 2009 Too small

Symantec Sygate N/A Aug. 2005 private

McAfee Trust Digital N/A June 2010 private

McAfee Ten Cube N/A July 2010 private

Verisign Network Solutions $17B March 2000 NS mainly a domain name registration business

Symantec Veritas $13.5B Dec. 2004 Veritas specialized in storage management

HP Arcsight $1.5B Sept. 2010 announced after Intel-McAfee

Table C1: Discarded Transactions

30 Appendix D: Valuation Using Discounted Cash Flows

APPENDIX D: VALUATION USING DISCOUNTED CASH FLOWS

BASE CASE (“AS IS”) CASH FLOW

The parameters detailed in Table D1 indicate the parameters used in the Base Case valuation of McAfee. The parameter values inform the model used to build the 9 year projected cash flow statements for the Base Case and other scenarios in which McAfee performance both improves as a result of its own efforts, industry trends and potential synergies with Intel. Each scenario is separately addressed. Parameter Value Rationale/Source

Short Term Revenue Growth Rate (2011-13) 8.5% Combined across both corporate and consumer segments. This variable also incorporates the various “endpoints” (PC, mobile, server, TV, etc) accounting for growth in each respective area. Average of Base Case from 2011 to 2013. See Figure D3.

Mid Term Revenue Growth Rate (2014-18) 6.7% Similar to short term rate, but for different periods. Average of Base Case from 2014 to 2018. See Figure D3.

Long Term Growth Rate (2019 forward) 3.3% US Average GDP growth (1947-2010). Similar to short term rate, but in perpetuity.

Cost of Goods Sold (% of Sales) 23.5% COGS between 2006 and 2009 was 21.6%, 23.4%, 24%, 25.2% respectively; average of 23.5%.

SG&A Growth (% of Sales) 1.0% Keeps in line with competitors.

D&A Decrement (% of Sales) 7.6% Keeps in line with competitors.

Tax Rate 28.0% McAfee’s current rate

CAPEX (% of Sales) 3.2% Keeps in line with competitors.

NWC short term (% of sales) (2011-13) -3.7% Split into two terms to account for acquisitions in emerging areas like cloud, mobile and embedded.

NWC mid term (% of sales) (2014-18) -1.4% Keeps in line with competitors.

WACC 8.18 McAfee traditionally does not carry any long-term debt, so its WACC is equivalent to its Cost of Equity (see Table D2)

Table D1: Model Parameters (values shown for Base Case)


McAfee Projected Cash Flow

As of December 31, 2009 (in millions)

Figure D1: McAfee Cash Flow Projection

Assumptions:

See Table D1 Revenue growth projections used in model explained below


McAfee’s Cost of Capital

Value Rationale/Source Market Return 10.55% S&P average monthly return from for past twelve months.

Risk Free Rate 2.65% US 10 year treasury bond yield. McAfee BETA 0.70 Average of BETA as determined by Google Finance and Yahoo Finance Cost of Equity 8.18% COE = Risk Free + Beta*(Market Return – Risk Free Rate)

Table D2: McAfee’s Cost of Capital (CAPM, as of Nov 11, 2010)

McAfee has held no long term debts since at least 2005. Therefore the WACC used in the cash flow projections is simply McAfee’s cost of equity (determined using CAPM) as shown in Table D2.

Revenue Growth Projection (2010-2018)

The revenue growth projections used in the Cash Flow forecast (Figure D1) was based on market growth across all devices in which McAfee currently has an offering in both the corporate and consumer segments (See Figures A2a and A2b). McAfee revenue between corporate and consumers segments have approximated a 60/40 split since 2007 (see Figure D2). The forecast adheres to the traditional split under the assumption that the decline in the PC consumer segment will not be fully offset by growth in other consumer segments. This assumption is based on two key premises:

In addition to a drop in PC shipments, and thus security software sales, consumers are increasingly opting for cheaper or free basic versions of security software27, and

Should consumers be willing to pay for security on mobile devices, the price will likely be less than for their PC, given the higher relative price of the PC, number of users and sensitivity of data.

2007 % sales 2008 % sales 2009 % sales

Corporate 769.8 59% 963.8 60% 1,213.9 63% growth 15%

25%

26%

Consumer 539 41% 636.4 40% 713.5 37%

growth 13% 18% 12%

Total $1,308.3 100% $1,600.2 100% $1,927.4 100%

rev. growth 14%

22%

20%

Figure D2: McAfee’s Revenue by Segment 2007-2009, in millions (Source: McAfee)

27 McAfee 2009 Annual Report


2010* 2011 2012 2013 2014 2015 2016 2017 2018

Corporate 1246.4 1357.8 1465.4 1591.2 1717.1 1837.2 1957.5 2077.2 2197.1

Consumer 773.9 843.1 909.9 988.0 1066.2 1140.7 1215.4 1289.8 1364.2

Total Revenue 2020.3 2200.9 2375.3 2579.2 2783.3 2978.0 3172.9 3367.0 3561.3 growth 4.8% 8.9% 7.9% 8.6% 7.9% 7.0% 6.5% 6.1% 5.8%

Figure D3: McAfee’s Forecasted Revenue by Segment 2010-2019, in millions (*McAfee actuals to September 2010)

Discounted Cash Flow (DCF)

The terminal value of McAfee (in 2003 forward) following the 10 year cash flow projections is determined as follows:

In millions Value Rationale/Source Future Growth Rate 3.3% US Average GDP growth (1947-2010) 2019 Free Cash Flow $405 The 2018 FCF determined in Figure D1 Terminal Value $8,332 Determined by discounting the 2019 FCF by COE – Growth Rate (i.e. 8.2% - 3.3%). Net Present Terminal Value $4,107 Terminal Value Discounted 9 years from 2018 to 2010 at rate of 8.2%

Table D3: McAfee’s Terminal Value

Figure D4: McAfee DCF Valuation – “As Is”

As indicated in Figure D4 McAfee, as is, is valued at just under $6.5 billion based on free cash flow. Taking excess cash into account McAfee’s valuation increases to approximately $7.4 billion or $46 per share based on figures as of December 31, 2009 (see Table D4).

in millions Value Source Equity Value $6,475 From Figure D4 +Excess Cash (2009) $893 Cash and cash equivalents. McAfee 2009 Annual Report. - Debt $0 McAfee has not carried long term debt since at least 2005 Equity Value (NPV) $7,368 Terminal Value Discounted 9 years from 2018 to 2010 at rate of 8.2% Shares Outstanding 159 McAfee 2009 Annual Report. Value per Share $46 Intel announced offer was at $48 per share.

Table D4: McAfee Valuation

34

Appendix D: Valuation Using Discounted Cash Flows 34

SENSITIVITY ANALYSIS

Short Term Revenue Growth

Mid Term Revenue Growth

Long Term Revenue Growth

COGS (% of sales)

SG&A Growth (% of sales)

D&A Decrement (% of sales)

Tax Rate

CAPEX (% of sales)

NWC mid term (% of sales)

WACC Valuation Valuation (from base)

Effect on valu-ation

Initial/Base Case

variable variable 3% 23.5% 1% 7.6% 28% 3.2% -1% 8% $ 6,475.20 --

Change in Short Term Revenue Growth (from average in base case) (+2%, -2%)

10.5% -- -- -- -- -- -- -- -- -- $ 6,800.87 5.0%

6.5% -- -- -- -- -- -- -- -- -- $ 6,157.09 -4.9%

Change in Mid Term Revenue Growth (from average in base case) (+2%, -2%)

-- 8.7% -- -- -- -- -- -- -- -- $ 6,937.01 7.1%

-- 4.7% -- -- -- -- -- -- -- -- $ 6,041.40 -6.7%

Change in Long Term Revenue Growth (+2%,-2%)

-- -- 5.3% -- -- -- -- -- -- -- $ 9,454.74 46.0%

-- -- 1.3% -- -- -- -- -- -- -- $ 5,213.54 -19.5%

Change in COGS (+2%,-2%)

-- -- -- 25.5% -- -- -- -- -- -- $ 5,689.49 -12.1%

-- -- -- 21.5% -- -- -- -- -- -- $ 7,293.34 12.6%

Change in SG&A Growth (+0.5%,-0.5%)

-- -- -- -- 1.5% -- -- -- -- -- $ 5,592.25 -13.6%

-- -- -- -- 0.5% -- -- -- -- -- $ 7,304.92 12.8%

Change D&A Decrement (+1%,-1%)

-- -- -- -- -- 8.6% -- -- -- -- $ 6,407.52 -1.0%

-- -- -- -- -- 6.6% -- -- -- -- $ 6,526.49 0.8%

Change in Tax Rate (+1%,-1%)

-- -- -- -- -- -- 29.0% -- -- -- $ 6,397.50 -1.2%

-- -- -- -- -- -- 27.0% -- -- -- $ 6,531.34 0.9%

Change in CAPEX (+0.5%,-0.5%)

-- -- -- -- -- -- -- 3.7% -- -- $ 6,195.30 -4.3%

-- -- -- -- -- -- -- 2.7% -- -- $ 6,733.49 4.0%

Change in NWC mid term (+2%,-2%)

-- -- -- -- -- -- -- -- 0.6% -- $ 5,462.95 -15.6%

-- -- -- -- -- -- -- -- -3.4% -- $ 7,465.88 15.3%

WACC (+1%,-1%)

-- -- -- -- -- -- -- -- -- 9.18% $ 5,398.66 -16.6%

-- -- -- -- -- -- -- -- -- 7.18% $ 8,069.38 24.6%

Figure D5: Sensitivity Analysis

= major effect on valuation, = moderate effect on valuation, = minor effect on valuation


VALUATION INCLUDING IMPROVEMENTS

Based on the sensitivity analysis provided in Figure D5 several “levers” are available to both positively and negatively effect McAfee’s valuation. Outside of a strong long term revenue growth rate (which highly influences terminal value) McAfee’s valuation is most effect by managing costs; in particular COGS, SG&A and NWC. Short and mid-term revenue growth has a smaller effect on valuation and other variables are virtually negligible.

The extent to which these levers are available to McAfee as a standalone entity compared to the synergies and future options that could be realized as a merged entity are detailed in the following sections.

Improvements (McAfee Standalone)

Type Description Financial Impact

(millions) Revenue Increase offerings and penetration in growing consumer mobile and tablet markets (without hardware

integration). Current offerings in this space target enterprise customers. Conservative revenue growth because as consumers are showing an increasing reluctance to pay for PC anti-virus (opting for free versions) this may extend to mobile devices that a) cost less than a PC and b) contain typically less sensitive material Mid-term revenue growth from 6.7% to 7.7%

$226

Revenue Same as above but partner with other hardware manufacturers (e.g. chips, motherboards, hard disk ) to better integrate security and pass on cost to consumer / bundle with cost of hardware to increase penetration. Mid-term Revenue growth from 6.7% to 8.7%.

$462 (incorporates

above)

Cost Reduce COGS (as a % of sales) to levels in-line with competitors. - McAfee has been historically between 17% and 25%. In 2010 forward “Base Case” projects

23.5%. - CA has been historically between 13% and 16%. In 2010 forward analysts project an average

of 14.9%. - Symantec has been historically between 17% and 24%. In 2010 forward analysts project an

average of 21.1%.28 Reduce COGS from 23.5% to 21.5%.

$818

Total Financial Impact $1,280

Table D6: Value of McAfee Improvements

Based on the above, the base valuation can be increased by $818 million based on cost improvements and $1,280 billion should McAfee successfully capture the revenue opportunities.

28 Wikiwealth. http://www.wikiwealth.com/research:ca and http://www.wikiwealth.com/research:symc

http://www.wikiwealth.com/research:ca

http://www.wikiwealth.com/research:symc


VALUATION INCLUDING INTEL SYNERGIES AND FUTURE OPTIONS

Type Description Financial Impact (millions)

Revenue Increased revenue in mobile and embedded space. In 2009, of Intel’s $35 billion in revenue, $1.4 was attributed to its embedded, digital home and mobility group. Intel’s pending acquisition of wireless CPU maker Infineon will add another $1.3 billion in revenue; giving Intel a 5.5% share in the highly fragment market (see Figure A4b). Integrated services is a key trend in this space (e.g. graphics and processing, security and processing, communications and processing) so combining security features in its chipset could grow its market share. Given the high fragmentation in the market (i.e. no over-dominant player) McAfee could help boost Intel share from 5.5% to 6.5% in the wireless space alone. An increase of 1% in share (based on 2009 market figures) effective 2012 generates an NPV $2,14 billion. See Figure D6 for NPV calculation that incorporates market growth over valuation period. Terminal rate is based on 3.3 GDP growth.

$2,136

Revenue Increase long term growth rate. Currently 3.3% based on GDP. Will be difficult to beat in perpetuity, however should McAfee’s market power improve based on Intel’s current PC and Server dominance and potential growth in “connected devices” a modest growth from 3.3% (in Base Case) to 4% is possible.

$710


Table D7: Value of Intel-McAfee Synergies

Figure D6: Incremental Revenues in Wireless Space via McAfee Synergies

Type Description Financial Impact (millions)

Revenue More aggressive growth in wireless space due to McAfee synergies. Extend incremental growth from 1% to 2%. NPV grows to $3.93 billion an increase of $1.8 billion (see Table D7)

$1,797

Cost SG&A structure for McAfee much higher than Intel (50% vs. 20%). Keep SG&A growth flat as a result of some backend cost synergies (IT, HR, etc.). A conservative drop from 1% to 0% growth given a) different cost structure of the two businesses/industries and b) McAfee was not intended to be fully integrated into Intel (i.e. little overhead savings).

$1,639


Table D8: Value of Intel-McAfee Future Options

Based on the above, an increase in valuation of $2.8 billion (Table D7) can be attributed to revenue synergies. A further increase in valuation of $3.4 billion (Table D8) can be attributed to future options. Revenue projections are by nature soft; actual growth could exceed or fall short of estimates.

37 References

REFERENCES

Bloomberg (2010). Intel to Buy McAfee for $7.68 Billion to Add Software. Retrieved from http://www.bloomberg.com/news/2010-08-19/intel-agrees-to-purchase-security-software-maker-mcafee-for-7-68-billion.html

Burton, P. (2010). Cash Remains Most Popular Tool for M&A; 'It's better than putting it in a. The Investment Dealers' Digest , 76 (40).

Business Insights. “Consumers and the Cloud”. Business Insights Limited. 2010.

Business Week(2010). Intel-WindRiver: What the Merger Means. Retrieved from http://www.businessweek.com/technology/content/jun2009/tc2009065_713999.htm Gartner (2010). Forecast: Security Service Markets, Worldwide, 2009-2014. Retrieved from http://www.gartner.com/DisplayDocument?id=1446016 Gartner (2010). Gartner Highlights Key Predictions for IT Organizations and Users in 2010 and Beyond. Retrieved from http://www.gartner.com/it/page.jsp?id=1278413Intel Coporation (2010). Hingley, Martin. “The World Server Market – A Forecast to Recovery”. February 2010. http://martinhingley.wordpress.com/2010/02/04/server-forecast-q110/ Intel to Acquire McAfee. http://newsroom.intel.com/community/intel_newsroom/blog/2010/08/19/intel-to-acquire-mcafee MarketLine (2010). Retrieved from http://www.marketlineinfo.com/library/DisplayContent.aspx?R=E82C088A-0488-4DB5-8953-9E316C2B44D1&N=4294834270 McAfee Corp (2009). McAfee acquires MX Logic. Retrieved from http://www.mcafee.com/us/about/corporate/mcafee_mxlogic.html McAfee Inc (2010). 2009 Annual Report. Retrieved from http://investor.mcafee.com/annuals.cfm McAfee Inc (2010). Annual Report. Retrieved from http://files.shareholder.com/downloads/MFE/1077637405x0x363412/C7FDC5BE-D33F-4FAD-9AC2-D5F257ED50BE/2009_10K_AR_Feb26_2010.pdf McAfee Inc. McAfee acquires Trust Digital. Retrieved from http://www.mcafee.com/us/about/corporate/mcafee_trustdigital.html Morgan, Timothy Prickett. “IDC Forecasts Server Sales Declines Until 2011; Blame X64 Boxes”. IT Jungle. June 2009. http://www.itjungle.com/tfh/tfh062209-story07.html Network World (2010). Intel drawn to vibrant security software market. Retrieved form PCWorld (2010). AMD Takes Processor Market Share From Intel, IDC Says. Retrieved from http://www.pcworld.com/article/187671/amd_takes_processor_market_share_from_intel_idc_says.html Thompson Research. Credit Suisse investor report: McAfee complements x86. Retrieved from http://research.thomsonib.com/gaportal/ga.asp Yahoo! Finance. Intel and McAfee: Annuity Models, Mobile Security and the Elephant in the Room. Retrieved from http://finance.yahoo.com/news/Intel-and-McAfee-Annuity-indie-2889376917.html?x=0&.v=1

http://www.bloomberg.com/news/2010-08-19/intel-agrees-to-purchase-security-software-maker-mcafee-for-7-68-billion.html

http://www.bloomberg.com/news/2010-08-19/intel-agrees-to-purchase-security-software-maker-mcafee-for-7-68-billion.html

http://www.businessweek.com/technology/content/jun2009/tc2009065_713999.htm

http://www.gartner.com/DisplayDocument?id=1446016

http://martinhingley.wordpress.com/2010/02/04/server-forecast-q110/

http://newsroom.intel.com/community/intel_newsroom/blog/2010/08/19/intel-to-acquire-mcafee

http://newsroom.intel.com/community/intel_newsroom/blog/2010/08/19/intel-to-acquire-mcafee

http://www.itjungle.com/tfh/tfh062209-story07.html

Download - Intel McAfee Acquisition

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