Intel is buying security vendor McAfee in a blockbuster $7.7 billion all-cash deal.

Intel expects the deal to close by the end of the year pending regulatory approvals.

During a press conference call, Paul Otellini, Intel president and CEO said that McAfee would be a wholly-owned subsidiary of Intel and would retain the McAfee brand, as well as its key management. With the deal, Intel further extends its play into software while also reinforcing its core silicon business with new security technologies.

"We believe that security will be most effective when enabled in hardware," Otellini said. "Joining McAfee with Intel will accelerate and enhance the combination of hardware and software solutions, improving the overall security of our platforms. The bottom line is that this will better protect Internet users and their devices."

But Gartner analyst Peter Firstbrook said Intel's (NASDAQ: INTC) decision to purchase McAfee (NYSE: MFE) rather than simply partner with the world's second-largest security software vendor doesn't make a lot of sense at first glance.

"Certainly Intel has other software capabilities, but now they're selling security with a chip," Firstbrook told InternetNews.com. "I don't believe you can build security on the chip. Security is dependent on the OS and the apps in the stack. You can't anticipate that in the chip."

Renée James, Intel senior vice president, and general manager of Intel’s Software and Services Group said Intel has been working with McAfee for the last 18 months on joint solutions. In her view, the most pressing problems in computing require both hardware and software, which is why Intel has been expanding its software division in recent years.

Intel acquired embedded operating system vendor Wind River in 2009 for $884 million.

The ability to embed security together with Intel's silicon is a key driver behind the deal, James said, noting that there is explosive growth in the embedded markets and they all need security. The move to IPv6 is also expected to be a key driver for embedded security

"If we look at the transition from IPv4 to IPv6, we're seeing an explosion of billions of devices and they all need to be secured," Dave DeWalt, president and CEO of McAfee said during the conference call. "The embedded market is a very specific and high-opportunity market for us."

James added that anywhere Intel is selling silicon there will be an opportunity to embed security.

That may be true, Gartner's Firstbrook said, but he wonders if Intel might have achieved the same goals without having to pay such a premium to do it.

"That's all fine and good, but it doesn't explain the rationale for buying the company for $7.7 billion," he said. "Partner with them? Yes. But there's no partnership synergy here, no route-to-market synergy. I think someone got sold a bill of goods or it's just a diversification move by Intel."

Intel shares shed $0.65 a share, or 3 percent, to $18.95 in Thursday morning trading while McAfee rocketed up $17.18 a share, or 57 percent, to $47.11.

Regardless, Intel sees the acquisition as an opportunity to diversify its product portfolio and create a new revenue stream in market that's expected to grow by more than 11 percent in 2010 alone.

"Security is as applicable in the data center and the PC as it is for any embedded device or emerging category of connected device," James said.

Otellini noted that Intel still intends to work with other security vendors even after the McAfee acquisition is closed. That said, he added that Intel will have a deeper integration with McAfee in effort to provide the best capabilities to the market.

"Everywhere we sell a microprocessor, there is an opportunity for a security software sale to go with it," Otellini said. "It's not just the opportunity to co-sell, but also the opportunity to deeply integrate into the architecture of our products."

Sean Michael Kerner is a senior editor at InternetNews.com, the news service of Internet.com, the network for technology professionals.

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