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Intel acquisition of McAfee

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Intel Acquisition of McAfeeDeal EvaluationSMGT 6050: Mergers, Acquisitions & Strategic AlliancesAdam Wexler Ebube Anizor Nasir Zulfeqar Gondal Prodip Saha Vijay Ranganathapura 12/6/2010

/ Table of Contents

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TABLE OF CONTENTSTable 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

Executive Summary

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EXECUTIVE SUMMARYOur evaluation found that the McAfee acquisition is in line with Intels strategy to acquire firms that can take advantage of Intels 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 McAfees products intersect with most lines of Intels 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 Intels 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. Todays 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 McAfees 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.

Introduction and Strategic Overview

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INTRODUCTION AND STRATEGIC OVERVIEWOn August 19, 2010, Intel Corporation (Intel), the worlds 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

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