An Analysis of the McAfee Acquisition

December 6, 2010 Ebube Anizor Nasir Gondal Vijay Ranganathapura Prodip Saha Adam Wexler SGMT 6050

Overview: Proceed with Caution

1
Strategic Fit
Growth in net-connected devices. Both lack presence in segment Hardware-Software security / Multi-function CPUs growing trend Both Intel and McAfee need diversification from mature segments DCF valuation between $7.4B and $8.7B (including cash on hand) Comparable transactions $3.5B or $4.7B (Sales or NI) Comparable companies - $3.4B or $6.9B valuation (E/B or P/E) Cost synergies minimal. Future value based on new product synergies

Valuation

Negotiation

Offer of $7.68B in cash, appropriate for valuation Agreement structured to lock out rival bidders 60% premium Seemingly no concessions made by McAfee Wholly owned subsidiary that will operate under McAfee brand Integration focused on cross-company product development and marketing Big Bet: Hardware-software security integration is competitive advantage in maturing and emerging segments McAfee ROE & ROI is low. Poor investment unless synergies realized

Post-Merger Integration

Overall Deal

Strategic Fit: Shared Challenges

Growth: strong in mobility segment, stagnant in desktop/server, steady decline in overall market
$250 $200 $150 $100 $50 $0 2010 2011 2012 2013 2014 2015 2016 2017 2018 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0%
Smartphone Notebook PC Desktop PC Netbook Tablet Server market size growth

Three Pillar Strategy focussed on CPU: Internet Connectivity | Energy Efficient Performance | Security Trend: Multi-function CPUs / Hardware-Assisted Security

Pure-play multiplatform strategy serving corporations and consumers Growing presence in mobile via acquisitions Risk: Loss of consumer revenue to cheaper options

Risk: Concentration of revenue in PC segment & dependence on few customers

0.3% 19% 80.7% Intel AMD Via 4% 3%
PC Data Centre Mobile+ Others
Qualcomm

Symantec

18% 75%

34%

26%

Texas Instruments STM Media Tek Infineon

22% 51% 11% 7%

McAfee Trend Micro IBM EMC Others

6% 11%

12%
12.3%

Other

4% 5%

PC/Server CPU Market

Intel Segment Revenue

Mobile CPU Market

Consumer and Corporate Security Market

Sources: TRENDS: Business Insights, Datamonitor, Euromonitor | MARKET SHARE: TechEye, AP, Yahoo | All figures 2009

McAfee Strategy

Intel Strategy

Valuation: Fair Price

Comparable Companies & Transactions
50 45 40 35 30 25 20 15 10 5 0 -5 0
As-Is Improvements Form hardware partnerships and reduce COGS to fall in line with competitors Synergies Options

4.0, 44.3 3.9, 33.7 0.5, 18.4 2.4, 20.2 1.2, 5.2 1.6, -1.6 1 2 3 4
Weighted Avg.

$16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0

Net Income Multiple

Revenue Multiple

$6.5B

$7.8B

$10.6B

$14.1B

Premiums: 119% income | 64% revenue vs. deals (2006-10)

VALUATON: $3.5 billion to $4.7 billion (Revenue vs. Net Income)

Value: no significant cost synergies, ALL value resides in potential new product offerings and entering new segments

VALUATION: $3.4 billion to $7 billion (E/B vs. P/E) Questionable Shareholder Value: Low Risk, Low Reward
30% 25% 20% 15% 10% 5% 0%
WACC D/E ROE ROIC CF Margin

VALUATION: $6.5 billion to $7.8 billion (no synergies)

Trans. $3.5B $4.7B
No recent deals of comparable size and relevance

Competitors (Intel) Intel McAfee Competitors (McAfee) Comp. $3.4B-$7B

$7B reflects earnings expectation

DCF $6.5B to $7.8B

More rigorous In line with P/E

w/cash $7.4B to $8.7B

*McAfee had $893M in cash as of 12/31/09

Target Price

Ratios

w/o cash* $6.5B to $7.8B or

Discounted Cash Flow

Offset decline in maturing segments with new offerings in mobile & cloud

Security integrated CPUs to gain traction in mobile & cloud and maintain revenue in core segments

Negotiation: High Price to Pay?

$7.68B in cash All equity / no debt on McAfee books No dilution of Intel shares Rival bidders locked out or forced to overpay 60% premium (McAfee shares were trading at a 12 month low) Based on multiples of companies or recent transactions could arguably have negotiated a lower price

Decision Details

McAfee to operate under Software Services Group with selective integration

Intel

Operations: Fully owned sub under McAfee name due to considerable brand equity
Data Center Digital Home

In Favor of McAfee
Market Value Control Premium Potential Synergies

PC Client

Embedded

Transaction/Integration cost
Transaction Structure Allocation of Value Competing bids Stock market/economy

UltraMobility
Wind River Software Software and Services McAfee

NAND Memory
Digital Health

Products: All McAfee offerings to remain

Management: agreements to remain for multiple years

Integration: Value of deal lies and shared product development sales, and marketing groups

BATNA:

Partner with or buy smaller pure play security firms like AVG or Kaspersky

Details

Separation necessary for access to non-Intel based customers (perception)

Structure

Develop Inhouse

Partnership

Purchase McAfee

Deal structured to ensure McAfee acquired

Integration: Focus on Product

Integration should focus on product development and sales & marketing opportunities (primarily for Intel)
Strategy
Org. Structure
No change in organization structure at McAfee McAfee brought under Intels Software and Services Group

Product Portfolio
No change at McAfee, but improvement in Intels chipset by providing chip level security

Sales and Marketing

Culture & Employees

Financial Reporting

Human Resources

McAfee as independent subsidiary Operates under McAfee brand No change in business model of Intel or McAfee

Both parties to implement cross selling Intel has direct access to corporate customers

No layoffs at Intel or McAfee complement ary business No change in culture at either of the company McAfee HQ remains same

Centralized Align with Intels reporting under Software and Services group

Alignment with Intels practices

McAfee offerings intersect with Intels entire portfolio, initial focus should be in corporate

Integration for corporate server/PC where value proposition has more traction then shift to mobile in corporate and consumer. Other segments to follow.

Product Portfolio

Netbooks Notebooks Desktops

Personal Computer Server

Cloud Enterprise

2011

Corporate Server and Cloud

Corporate & Consumer PC

2012
Embedded Mobile

Corporate Mobile

Consumer Mobile

Digital Home Auto

Tablet Smartphones

2013

Digital Home, Auto, etc.

Timeline intended to portray integration sequence not length/effort.

Integration Sequence