Do Not Sell Intel On McAfee News

| About: Intel Corporation (INTC)


Intel is thinking of selling its McAfee security unit.

INTC could get $7.7 billion, about the unit's sales rate, improving margins on the rest of the business.

Security software is going back to the drawing board with cloud and the Internet of Things.

Intel (NASDAQ:INTC) is not getting out of the security business.

Intel is getting out of the PC business. Intel sees PCs as a dead-end street, a no-growth zone, more trouble than they're worth. In terms of earnings, it's right.

But selling the McAfee unit is not the same as getting out of security. Investors are making a mistake to sell the stock based on the reports.

Intel originally bought McAfee for $7.68 billion in 2010, and there is no doubt that the deal has been a disaster for it. That's because security growth has become disconnected from the PC by the cloud. If you want to get big venture capital money right now, claim you have a solution for cloud security.

Right now, there isn't one. There are point solutions, partial solutions involving end points, and monitoring, but you can't just buy a cloud security solution. You have to build one, out of software, out of procedures, and out of pieces, and accept the reality that everything is vulnerable. Integrated cloud security has become the focus of an acquisition frenzy, but acquisitions have to be turned into products by programmers before it's anything more than marketing.

That's why a lot of old-line companies such as Intel, which treat acquisitions as a use of capital, especially in the software business, have been exiting security. Dell has spun out SecureWorks (NASDAQ:SCWX), and Hewlett-Packard Enterprises (NYSE:HPE) sold its Tipping Point unit. Until real solutions are found; in other words, cloud security will be a business of hype, dominated by start-ups testing their "solutions" on real customers, a world of buyer beware.

The Internet of Things has the same problem. Security frameworks have yet to be built. They will probably be built, first, in the industrial sector, where a single buyer can control the process. That's why the best play for IoT today remains General Electric (NYSE:GE) since it builds the big things where IoT can have value, and is investing heavily in control software. It also has the financial strength to handle the risk that early solutions will be found wanting.

Intel is hoping to get $7.7 billion from the sale or spin-out of the unit, which would free its balance sheet to build its cloud sub-system business and its IoT chip business, while waiting for solutions it can then buy at an early stage. The business is only marginally profitable, so while dumping, it may subtract substantially from the top line - $55 billion last year - it's unlikely to do much to the bottom line - $11.4 billion last year. Which means after the deal is done, Intel's shareholders wake up to see fatter margins.

So while this deal looks like a humiliating retreat for Intel, assuming it happens, it is at worst a strategic withdrawal, based on knowledge of how the software markets work, and an improvement in margins that will allow it to grow.

Disclosure: I am/we are long INTC, GE.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.