the announcement
Last Thursday INTC issued a press release and held a web news conference announcing that it had reached an agreement with the board of directors and top management of McAfee to acquire MFE for $48 per share in cash. This would be a total of about $7.7 billion, or $6.8 billion after subtracting the cash MFE has on its balance sheet.
Assuming regulatory and shareholder approval, the merger could be completed before the end of this year. Presumably, the two firms are aiming to have this happen, to save the effort and expense of producing a superfluous, pre-merger set of audited accounts. Senior management of MFE have agreed to stay on at INTC for an unspecified period of time–probably at least a couple of years–operating as a more or less autonomous unit and reporting to one of INTC’s division heads.
the numbers
MFE rose almost 60% on the news, to $47 a share. INTC fell about 3%. To me, this looks like ordinary risk arbitrage activity, making a statement that no other bidder is going to emerge (I can’t imagine who would) and that the deal will face no real obstacles to completion.
Over the past five years, cash generation at MFE has been growing at about a 15% annual pace and now stands at a what I estimate to be a touch over $3 a share annually. There are enough unusual non-cash expenses charged against operations that net income is only about 40% of that. But because earnings are so unreflective of cash flow, I think they shouldn’t be the standard used in evaluating whether the acquisition makes financial sense.
MFE has no debt and about $2 a share in working capital, a quarter of that in cash. Net of cash, the acquisition cost is $46 a share.
INTC says that, ex unusual items, MFE will be accretive to INTC earnings immediately. This is at least in part due to the fact that MFE’s profits will replace interest income on the cash deposits INTC will use to pay for the MFE shares. At today’s rates, that income has to be very close to zero, so being accretive right away isn’t saying much.
Let’s assume I’m correct that current MFE cash generation is about $3 a share and is growing at a 10% annual rate (given competition in the internet security business, that may be high). Let’s also say that the appropriate rate to discount MFE’s future cash flows back into the present is 5% (that’s probably too low, but its halfway between the zero INTC is earning on its cash and the 10% it would cost the company to issue new stock). On these assumptions, it takes MFE about ten years to pay for itself.
That’s a long time. So the rationale for the acquisition can’t be that MFE stock is really cheap.
INTC’s reasoning