Intel Corp. agreed to buy security-software specialist McAfee Inc. Thursday for $7.68 billion, a surprise transaction that underscores the company's determination to expand beyond its stronghold in chips that power most of the world's computers.

The deal, the largest in Intel's 42-year history, was described by the companies as evidence that security is becoming one of the fundamental pillars of computing. With Internet connections rapidly being added to consumer electronics devices, appliances, industrial equipment and other hardware, the approaches that have served to protect today's personal computers and servers aren't adequate, Intel and McAfee officials said.

Armed with expertise from McAfee, Intel suggested security could be built more broadly into computer chips and other hardware, creating products that are more resistant to attack. "We believe security will be most effective when enabled in hardware," said Paul Otellini, Intel's chief executive officer, in a conference call.

The deal values McAfee at $48 a share, a premium of 60% over the company's closing price Wednesday. McAfee shares jumped 58% after the deal was announced, and were trading at $47.02, up $17.09 on the New York Stock Exchange. Intel's shares slipped 3.5% to $18.90, off 69 cents on the Nasdaq Stock Market in Thursday afternoon trading.

The pact is another sign of consolidation that is winnowing the ranks of mid-sized technology companies. Tech giants dominant in particular areas of the industry are using acquisitions to grab footholds in faster-growing markets. Hewlett-Packard Co.'s recent purchase of Palm Inc. was aimed at moving the world's largest PC maker into the smartphone sector. Meanwhile, Oracle Corp. purchased Sun Microsystems last year to expand from selling software into providing a complete hardware and software package for corporate IT departments.

McAfee, founded in 1987 and best known for its widely popular antivirus software, has marshalled more resources to go after the quickly developing mobile market. It recently announced the purchase of mobile-device security company tenCube, a move that follows its purchase of Trust Digital, another mobile-security-software firm.
McAfee has long battled rival Symantec Corp. in the computer-security market. The company, based along with Intel in Santa Clara, Calif., was widely thought to be seeking a buyer.
Shares of Symantec rose 7.3% Thursday morning, and were trading at $13.50, up 91 cents, in a sign some investors are betting the company could also become an acquisition target.
Intel, for its part, has been looking at software firms to bring it into new markets. Mr. Otellini had indicated a major focus on software, an effort spearheaded by Renee James, Intel's senior vice president and general manager, of its software and services group. And in April, Intel Chief Financial Officer Stacy Smith said that the company would be looking at software acquisitions to help it make more customized server and mobile products.
The company is targeting the smartphone space with its Atom chip, which is widely popular in netbooks, but has yet to make waves in a cellphone market dominated by less power-hungry chips built by Qualcomm Inc. and others off of a design from ARM Holdings PLC.

Last year, Intel purchased software-maker Wind River Systems Inc. for $884 million to help move the Atom chip into embedded devices such as electronic billboards or automatic teller machines. By providing software, Intel makes it easier for customers to adopt its chips instead of those made by rivals.
Like Wind River, McAfee will be operated as a separate subsidiary under its own brand. Mr. Otellini said it has received commitments from McAfee management to stay on in their current jobs for "multiple years."
The deal is Intel's second this week. Monday, Intel said it would buy Texas Instruments Inc.'s cable-modem product line for an undisclosed amount.
The acquisitions come as Intel last month reported its best-ever quarterly results in an ongoing rebound in the semiconductor market. Intel expects the deal to slightly cut into earnings the first year after closing because of merger-related charges, and have little impact on the bottom line in the second year. A slight increase after those charges are seen in the first year.
For its part, McAfee's second-quarter earnings rose 38%, allaying concerns about its business after a weak first quarter. The company said sales grew sharply in North America, one of its key markets.
"I'm very excited and fully committed to joining the Intel team," said McAfee's President and Chief Executive Dave DeWalt.
Both boards of directors have unanimously approved the deal. The agreement still requires McAfee shareholder approval and regulatory clearances.
Intel was advised on the deal by Goldman Sachs and Morrison & Foerster LLP. McAfee was advised by Morgan Stanley and Wilson Sonsini Goodrich & Rosati.

Source: online.wsj.com

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