Intel – McAfee Acquisition Scrutiny Not a Concern for Stock Value

December 21st, 2010 by Trefis Team
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Intel’s (NASDAQ:INTC) paid a handsome $7.68 Billion to buy online security firm McAfee (NYSE:MFE) back in Aug 2010. [1] As a result we updated our model to reflect the impact of acquisition and the premium payment, which resulted in a slight downgrade to our price estimate. However, it now seems that the transaction might be delayed or may even come under threat of termination due to the undergoing scrutiny from European Union. [2]

Our price estimate for Intel stands at $26.28, well ahead of market value.

Why Intel Decided to Buy McAfee?

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Intel’s primary rationale behind the McAfee acquisition was that a variety of online security threats can be better handled with a combination of software and hardware. Thus by embedding McAfee software in its processors, Intel not only expects to provide better security solutions but also hopes to gain a significant technological advantage over AMD (NYSE:AMD). For additional details you can refer to our previously published article that discusses the strategic significance of McAfee acaquisition (McAfee Deal Could Lift Intel’s Stock by 3%), in which we discussed how Intel can gain by improved sales of its processors with McAfee’s advantage.

The chart below illustrates the impact of Intel’s notebook processor market share on the company’s stock value.

What European Union Sees

After the preliminary review of the deal, The European Union is concerned that it could be difficult for McAfee’s competitors to compete in the market if McAfee has privileged access to chip features. There are questions like whether Intel could could reserve some of the chip performance for McAfee’s software at the expense of competitor software. This is especially worth considering since Intel by far dominates the microprocessor market, and European Union fears that McAfee might get an unfair advantage through the acquisition.

Impact to Estimate if Deal Doesn’t Go Through

We estimate that McAfee constitutes about 2.5% of Intel’s price estimate, and is thus a very small portion of the company’s total value. We believe that Intel has paid a hefty premium to buy McAfee. Our baseline value estimate for McAfee’s stock stands at $4.9 billion which is about 35% below Intel’s payment of $7.68 billion. Consequently, if the deal doesn’t go through, our price estimate for Intel could see very slight upside (less than 2%). However, we note that this upside would be offset by the elimination of potential gains in Intel’s notebook processor market share stemming from the deal.

You can see the complete $26.28 Trefis price estimate for Intel’s stock here, which includes McAfee operations.

Notes:
  1. The Wall Street Journal: Intel Bets Its Chips on McAfee [↩]
  2. The Wall Street Journal: EU Has Concerns on Big Intel Deal [↩]