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Intel Trims Business, Sells Majority Stake in Security Unit

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Intel Corp (INTC - Free Report) has finally completed the divestiture of its majority stake in Intel Security division to alternative asset fund manager TPG. The newly spun-off unit has been renamed McAfee, with TPG holding 51% stake.

As previously announced, Intel and TPG valued the security division at $4.2 billion. Per the agreement, Intel received $3.1 billion in cash and retained 49% stake post the completion of the transaction.

Per an agreement with TPG, private equity firm Thoma Bravo also joined as a minority shareholder. Moreover, TPG’s investment of almost $1.1 billion in the standalone business will boost McAfee’s capital base.

The negligible movement in Intel’s share price on Apr 5 reflected that the news was already factored in. We note that the stock has underperformed the Zacks Semiconductor General industry in the last one year. While Intel returned 14.8%, the industry gained 38.4%.

McAfee: A Burden for Intel

Intel acquired McAfee in 2010 and renamed it as Intel Security Group (ISG) in 2014. In 2016, ISG reported revenues of $2.16 billion, up 8.8% over 2015. However, the group contributed only 3.6% of Intel’s total revenue of $59.39 billion.

We believe that the unit failed to live up to Intel’s expectations primarily due to faulty planning and execution problems. Moreover, Intel’s preoccupation in maintaining its dominance in the chip market also affected the unit. Notably, the company’s chip market too has come under threat due to increasing usage of ARM-based chips by the likes of Microsoft (MSFT - Free Report) .

Further, increasing competition in the security software market that included the likes of FireEye (FEYE - Free Report) and Symantec (SYMC - Free Report) also negatively impacted ISG’s growth prospects.

Growth Prospects Improving  

We believe that the completion of the divestiture will help Intel to focus on fast growing businesses like data center, memory, Internet of Things (IoT) and autonomous car technology. The majority stake sale will free up resources for the company, which it will invest on these fast growing businesses.

Intel’s data center business and cloud have been registering significant growth. The company’s bolt-on acquisition strategy is driving growth. Acquisitions of artificial intelligence (AI) startups Movidius and Nervana Systems will help Intel in strengthening footprint in data center, machine learning, deep learning and IoT businesses.

The recent acquisition of Mobileye is a significant development that will boost the company’s presence in the autonomous vehicle market. Further, Intel’s collaboration with Ericsson to advance 5G research presents solid growth opportunity.

We believe that these factors will eventually help the Intel stock to rebound in the long haul.

Currently, Intel carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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