Intel Corp (INTC.O) said it would buy security software maker McAfee Inc (MFE.N) for $7.7 billion to capitalize on rising demand from consumers for better protection of their laptops, smartphones and tablets.

Intel Corp (INTC.O) said it would buy security software maker McAfee Inc (MFE.N) for $7.7 billion to capitalize on rising demand from consumers for better protection of their laptops, smartphones and tablets.

Intel will pay $48 per share in cash for McAfee in its biggest acquisition ever. The price represents a 60 percent premium to McAfee's Wednesday closing price -- a level company executives defended as within the range of other large software and security deals.
The pact is the latest in a steady stream of technology deals, including Dell Inc's (DELL.O) $1.3 billion purchase of storage company 3PAR Inc (PAR.N) earlier this week.
The McAfee deal, which caught some analysts by surprise and worried others because it marries a chipmaker and a software maker, underscores Intel's determination to continue expanding beyond the PC market to hot businesses like mobile devices and smartphones.
But for the moment, the biggest advantage in the deal may be Intel's ability to sell McAfee's software to PC customers. Intel supplies roughly 80 percent of the microprocessors used in PCs.
"Everywhere we sell a microprocessor there's an opportunity for a security software sale to go with it," Intel Chief Executive Paul Otellini said on a conference call.
Intel shares dropped 3.5 percent in morning trade, while shares of McAfee surged 57 percent and helped boost the wider security sector. Symantec Corp (SYMC.O), the biggest security company, saw its shares rise 5.2 percent.
"It's slightly out of left field. Nobody would have seen this coming," said Chris Hickey, an analyst at Atlantic Equities. "At the simplest level, Intel has strong relationships with a number of PC and server vendors. This should be an opportunity to cross-sell McAfee's security software into those PC vendors."
Hickey added, "Ultimately, when we look several years out, almost every device in the home is likely to be connected to the Internet. Intel clearly wants to participate in that market."

DEAL FOLLOWS PARTNERSHIP


McAfee, which was founded in 1987 and had revenue of $2 billion in 2009, has been working with Intel on a variety of projects for the last 18 months.
Through that partnership, Intel "decided a combination could be very powerful for bringing enhanced security to consumers," Renee James, who runs Intel's software and services group, said in an interview.
"We have lots of activities going on in growing connected devices ... from connected television to mobile devices," she said. "As we look at the businesses we're in, we see that security is the No. 1 purchase consideration. We believe that we can enhance security with hardware and come up with a better solution."
Intel said that McAfee would become a wholly owned subsidiary, maintaining all of its current business lines, but that any "deep collaboration" between the two companies was likely about two years away.
Boards of both companies had approved the deal, and Intel expects it to close once it gains McAfee shareholder approval and regulatory clearance. Executives said they hoped to close the deal by the end of the year.
Vijay Rakesh, an analyst at Sterne Agee, said he was surprised by the size of the premium.
"I think people were probably (expecting) some smaller acquisitions from Intel. It's definitely -- even by Intel's standards -- a pretty big acquisition for them." said Rakesh.
The chipmaker has made several software acquisitions in the last few years, including the purchase in 2009 of Wind River, a company focused on mobile software.
Some analysts, including Trip Chowdhry of Global Equities Research, questioned the logic of combining a chipmaker with a software security firm.
"I think this is a very short-sighted acquisition because of two things: McAfee is of an older generation and their focus has been desktop security -- that is their bread and butter," Chowdhry said. "Secondly, I think if you think about desktop security, Microsoft's essentially is a better product."
Another analyst, Dunham Winoto at Avian Securities, said of Intel: "I'm not sure if this is going to be something they need to do at this stage. Normally they had bought companies that are more along the lines of hardware."
In addition to the Dell-3PAR deal announced earlier this week, International Business Machines Corp (IBM.N) last Friday said it would buy software firm Unica Corp (UNCA.O) for $480 million. Last month, Tyco Electronics Ltd (TEL.N) agreed to buy network equipment maker ADC Telecommunications Inc (ADCT.O) for $1.25 billion.
Technology companies such as Hewlett-Packard Co (HPQ.N) and Oracle Corp (ORCL.O) are also believed to be trawling for deals.
Intel was advised by Goldman Sachs and Morrison & Foerster LLP in the deal while McAfee's advisers were Morgan Stanley and Wilson Sonsini Goodrich & Rosati.