In Search of the Perfect Investment

I love Intel. They make great chips. But nothing else great. For years they’ve tried new products, but failed. For years they’ve spent zillions on buying great companies and promptly destroyed them, wasting even more zillions in the process.  I’ve watched this again and again.

Great technology companies have great technology innovators. But they’re rare. There’s the Ultra-Great like Steve Jobs of Apple. And there’s the semi-great, like Andy Grove and Gordon Moore of Intel. The semi-great have only one great product in them. That’s the difference.

To be ultra-great you need to understand buzz. Jobs makes buzz. So much that people line up outside his stores from early morning to buy his latest madness.

Intel has “Intel Inside.” Whoopee do!

Intel has just spent an outrageous amount of money buying a second-rate software security company called McAfee. Intel will destroy McAfee and then quietly sell it for pennies on the dollar in about five years.

Can you think of any other technology product with less sex appeal than security? Fear of some vandal hurting your PC is a horrible marketing pitch.

I’ve watched Intel for 30 years. I’ve tried to deal with them over the years. It’s been awful. I even tried to buy one of their failures — Dialogic — but they sold it quietly for pennies on the dollar with no auction, no negotiations — as though they were embarrassed about their failure and just wanted the eyesore out of sight.

Suffice, I’ve never been an Intel shareholder and can’t see any reason to be one now. For your amusement, here’s today’s New York Times story on the unbelievable, outrageously expensive Intel takeover of McAfee.

With McAfee Deal, Intel Looks for Edge

SAN FRANCISCO — Hoping to accelerate its move into smartphones and consumer electronics, the chip maker Intel has turned to security software and services as a way to separate its products from those of its rivals.

On Thursday, Intel paid $7.68 billion to acquire McAfee, one of the leading sellers of antivirus and other computer security software. The companies, both based in Santa Clara, Calif., plan to create tight links between Intel’s chips and McAfee’s security technology.

Such ties will be crucial as millions of products, including phones, cars and home appliances, gain more computing horsepower and access to the Web, according to the chief executive at Intel, Paul S. Otellini.

“This will better protect Internet users and their devices,” Mr. Otellini told Wall Street analysts.

Investors appeared flummoxed by the purchase, Intel’s biggest ever, sending the company’s shares down about 3.5 percent, to $18.90, in afternoon trading. McAfee shares rose 57.07 percent, to $47.01.

With the purchase, Intel is spending a huge chunk of the $12.2 billion in cash and short-term investments it had on hand as of last quarter. Analysts expect that other technology companies sitting on large cash hoards, like Microsoft, Apple, Cisco and Google, are primed to make more major acquisitions, though some analysts have urged the companies to give shareholders some of the money in dividends.

Analysts doubted that McAfee’s business would have much near-term impact on Intel’s bottom line.

Intel’s fortunes are tied to PCs and the computer servers that go into data centers. As such, Intel, with revenue of $35.1 billion in 2009, goes through boom-and-bust cycles as demand waxes and wanes. McAfee, with revenue of $1.93 billion last year, sells a great deal of software on a subscription basis, which can smooth out financial results from quarter to quarter and year to year.

“There are no immediate synergies that I can see,” said Stacy A. Rasgon, an analyst with Sanford C. Bernstein & Company. “It is a strategic deal, and it is a pretty rich price for a strategic buy.”

Intel will pay $48 a share in cash, a 60 percent premium over McAfee’s Wednesday closing stock price of $29.93. The deal hinges on standard regulatory approvals.

Demand for McAfee’s core security products should rise as people look to protect their smartphones, cars and Web-ready products from Internet threats, said David G. DeWalt, the chief executive at McAfee. Consumer electronics products like phones and hand-held gadgets face fewer threats than PCs, although it is expected they will be subjected to the same torments from hackers as they gain access to the Internet.

McAfee has 17.7 percent of the market for securing computing devices, trailing the market leader Symantec, which has 36.2 percent, according to the research firm IDC. In the last couple of years, McAfee has gained ground on Symantec by signing a large number of deals with PC makers and Internet service providers to offer its security software to consumers and workers.

Intel already builds a number of security hooks into its chips. These tools can help block malicious software from disrupting a computer or give a technician the ability to fix a computer from a remote location. The purchase of McAfee would give Intel access to more security specialists and the ability to hardwire more of these types of tools into its chips.

Still, analysts noted that Intel spent plenty to obtain these security skills. “Eventually the software features will get embedded in the hardware,” said Ashok Kumar, a technology analyst with Rodman & Renshaw. “So maybe this is an expensive way for Intel to acquire domain expertise.”

With its share price stagnant for years, Intel has been hunting for growth outside of the PC and computer server markets. In particular, Intel has decided to go after the smartphone and consumer electronics segments, which are dominated by rival chip designs.

Intel’s growth push has been met with resistance, largely because its chips remain more expensive and power-hungry than those of rivals.

McAfee will operate as an Intel subsidiary, reporting to Renée J. James, the head of Intel’s software and services group.

In an interview, Ms. James declined to provide details on how Intel products would gain an edge over the competition through the McAfee technology.

She has led Intel’s transformation into a software powerhouse.

Last year, Intel bought Wind River for $884 million, giving it a software maker that played in the consumer electronics and wireless markets. Earlier, Intel purchased Havok, a company that provided software tools to video game makers.

Intel and Nokia also work together on the MeeGo operating system for smartphones and other consumer electronics devices, placing the companies in competition with Apple, Google and Microsoft.

Harry Newton,who wishes he had a great joke for you this morning. Suffice I’m now in Vermont attending the pre-pre- and pre-wedding festivities. The marriage happens on Saturday. Then there’ll be a farewell brunch on Sunday. I remember when I got married. It was a simple service at the U.N. Chapel ($150) and a return to our apartment for drinks and a cake ($350).  Now, some weddings last longer than their marriages. This one won’t.  Michael and Anne are grafted together for life. Which is nice to see. And  if I don’t stop crying, I’ll never finish this column. Buy Kleenex.