Private equity firms have always found a sweet spot in buying business lines that are spun-off from corporate giants. These so-called ‘carve outs’ play into the wheelhouse of PE buyers who have the cash to quickly take a business off the hands of a restructuring corporate titan, and it is the playbook for home run deals like Carlyle’s purchase of Axalta from DuPont , Pernod Ricard's sale of Dunkin Brands to a consortium of buyers, and tech blockbusters such as Avago and Skype.
TPG Capital’s $1.1 billion purchase of a majority stake in McAfee from Intel INTC -0.30% on Tuesday evening may eventually join the ranks of these corporate carve out deal wonders.
TPG is buying McAfee through a joint venture with Intel in which it will take a 51% stake in the IT security firm and run it as a new independent company. Intel will hold onto a 49% stake in McAfee and is providing $2 billion in short-term financing to TPG’s purchase, which values McAfee at an enterprise value of $4.2 billion when including the company’s debt.
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The newly independent McAfee, freed from Intel’s over $50 billion a year semiconductor business, will be led by IT veteran Chris Young and is expected to have greater agility as pure-play IT security firm. Perhaps McAfee, renamed Intel Security in 2014, was getting lost in the shuffle and stymied from making new investments in R&D, or acquisitions.
McAfee’s antivirus software is still one of the most widely recognizable products in corporate IT departments, but it is newer security companies like FireEye, Palo Alto Networks and Proofpoint that are growing at a faster clip, not to mention the hundreds of startups seeking to disrupt the security space. In the first half of 2016, Intel Security generated $1.1 billion in revenues, or 11% growth, and operating income of $182 million. Its total bookings increased 7% from 2013 to 2015 (excluding fluctuations in the U.S. dollar).
Why might TPG do well with McAfee? A lot boils down to price.
Long before today’s buying boom in software and security companies hit a frenzied pace, Intel paid $7.6 billion in cash to buy McAfee in an effort to integrate new forms of security with fast-growing mobile device and wireless network usage. But, TPG is effectively buying McAfee for nearly a quarter of the price Intel paid a half decade ago.
Another good tell on the deal’s prospects is Intel’s reticence to sell entirely.
Intel is maintaining a 49% stake in McAfee, which can be seen as an acknowledgement that that the semiconductor giant thinks McAfee is worth more than $2.2 billion, or $4.2 billion when counting debt. Here’s how Intel CEO Brian Krzanich put it: ”As we collaborate with TPG to establish McAfee as an independent company, we will also share in the future success of the business and in the market demand for top-flight security solutions, creating long-term value for McAfee’s customers, partners, employees and Intel’s shareholders.”
Intel will continue to work closely with McAfee on its growing products, Krzanich noted. Left unsaid is the notion that freeing McAfee may allow Krzanich to continue refocusing Intel on new growth opportunities like the ‘Internet of Things’ that tie more closely to its semiconductor strengths.
For TPG, a bet on security may be slightly opportunistic after corporate heavyweights like Intel, Symantec SYMC +0.50%, HP , and Cisco all bought heavily into the security market. Now, the security buying has slowed as strategic and PE buyers turn their sights to publicly traded SaaS and cloud companies. The slate of 2016 deals includes Raxspace, Marketo, Demandware and LinkedIn, with many expecting a busy end final quarter for software buyouts.
It doesn’t seem like TPG had to navigate this frenzied bidding after sourcing the deal directly with Intel and agreeing to a carve out even before the final separation work on McAfee was finished. Intel, after all, is financing TPG’s purchase because McAfee still is yet to have its audited financials completed as a standalone business.
“We believe that McAfee will thrive as an independent company. With TPG’s investment, along with continued support from Intel, McAfee will sharpen its focus and become even more agile in its response to today’s rapidly evolving security sector,” said Jim Coulter, Co-Founder and Co-CEO of TPG, in a press release.
Given McAfee’s leading global market position, loyal customer base, and trusted technology, we see a compelling opportunity to invest in a highly-strategic platform that is growing consistently and addressing significant and
evolving market demand,” added Brian Taylor, a TPG partner.
TPG has had success in tech sector carveouts. In 2005, it partnered with Lenovo on the carve out of IBM’s PC business. Other successful tech carveouts include ON Semiconductor, and it is an investor in promising startups like Tanium and Zscaler. McAfee may eventually also be seen as a deal win for TPG.
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