Intel/McAfee deal and the security industry state of mind

Intel announced last Thursday it is acquiring McAfee at 60% premium, a $7.8 Billion all cash-transaction transaction. It is a positive vote of confidence in the security industry, signaling that the continued strategic value of security products and hence the likely above average industry growth rate in the foreseeable future. What does it mean to the security industry strategically? Would it accelerate the consolidation in the security industry and shifting focus to acquisitions of larger public-company companies? Unlike many industry analysts who have commented that the event will create tectonically change industry landscape, with Intel leveraging their PC manufacturer relationships to gain significant share in end point security (for McAfee) and to become a significant player in network security as well, we do not believe that would be the case and Intel is likely to create more sustainable opportunities for existing independent security vendors – large and small.

First, Intel has had its fair share of DOJ and EU anti-trust challenges and is unlikely to be given the free ride to leverage their relationships with other PC manufacturers to gain OEM business for McAfee’s end point security business. In contrary, we believe end point business will be declining and we have been saying that we will begin to see security spending shifting from end point to data centers driven by the growth in cloud computing and virtualization. Intel mentioned that it will be building security into its chipsets. Those of us who have been in the security industry long enough will tell you that it would not be easy architecturally and culturally. We believe with the exception of encryption and perhaps some types of end point security for mobile devices, Intel will not be successful in moving security to hardware/chipsets for the mass market. Again, security is moving AWAY from the end points. It really does not matter that much in what form end point security will be consumed. We believe pricing pressure will accelerate for end point security vendors. How about network security? For those of you who might not be around 10 years ago, Intel was in the networking business and decided to exit due to lack of focus and intense competition. We do not believe it has the DNA and expertise to lead in the network business. Of the $2 B in revenue McAfee generates, $500 M or so comes from network security (mostly from Secure Computing). Is that going to move the needle of a $40 B company like Intel? Highly unlikely. What does it mean? It means it will benefit network security vendors such as Check Point, Juniper, and Cisco, plus other niche but focused vendors such as Bayshore because of our marketing leading Layer 7 application firewalls for high end enterprises’ data centers and the private clouds.

Having said that, on behalf of the security industry, we would like to thank Intel for the generous premium and vote of confidence in our industry.