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Security software maker McAfee (MFE) has received a buyout offer from semiconductor giant Intel (INTC - Free Analyst Report), which has offered to pay about $7.7 billion, or $48 a share, a whopping 60% premium to the preannouncement price. But Intel can afford it since its share price has not faltered much in recent quarters, as has McAfee's. Indeed, over the past year, INTC stock has outperformed MFE's by some 25 percentage points. And the deal allows the chip maker to further its foray into software designed for Internet connectivity and portable devices. These segments are growing quickly and now include a devices as disparate as ATMs and automobiles. The deal will probably dilute Intel’s earnings this year, but be accretive starting in 2011.

As for McAfee, we think there is no question that shareholders should take this offer, which is near the high end of our 3- to 5-year Target Price Range. True, the company has done a reasonable job expanding revenues, thanks to partnerships with PC manufacturers. And the release of Windows 7 has spurred what appears to be a major up cycle in PC purchases, which has lifted demand for security software. Still, competition has risen substantially in recent years. A growing number of rivals, such as AVG and Check Point (CHKP), which makes ZoneAlarm, have been offering strong security products for free (to supplement a broader line) and have been steadily gaining popularity. Microsoft (MSFT - Free Analyst Report), too, now is offering a free product called Security Essentials meant for consumers and small businesses. The product has proven itself to be very robust, and with version 2.0 in the offing (it's currently in beta release), the threat to McAfee only promises to grow.