TPG’s carveout of Wind River from Intel driven by data interest

TPG’s acquisition of Wind River, an embedded systems software company, is its second carveout of a business owned by Intel, following last year’s purchase of a majority stake in McAfee, the chipmaker’s cybersecurity unit.

Partner Nehal Raj, who leads TPG’s technology group, said the firm was the “logical” choice when Intel was looking to sell off another non-core business.

“The McAfee relationship that we built with them has been very beneficial, from their perspective,” Raj said. Carveouts involve complicated negotiations over how services like tax and accounting will be transitioned; “transacting with us allowed them not to have to recreate the wheel with someone else.”

Both transactions were out of TPG Partners VII, which closed on $10.5 billion in 2016.

For Intel, the deals aren’t primarily about pricing.

“Any amount of cash we pay is not going to move the needle for them; they have tens of billions on the balance sheet.” Raj said.

“What they’re looking for is a trusted partner who can carve out the business, maintain any commercial relationships that they need on an ongoing basis, and make it as quick and painless a divestiture process as possible.”

Both deals stem from a change in corporate strategy. Under previous leadership, Intel pursued diversification beyond processors, using semiconductor profits to purchase supposedly complementary software companies.

But the expected synergies didn’t pan out, and the current executive team decided to refocus on the competitive chip business, which meant exiting recent acquisitions.

Wind River, which Intel bought in 2009 for $884 million, provides what it calls a real-time operating system.

Raj described this as software that makes commodity-hardware devices intelligent, “allow[ing] them to perform a specific task. And typically these tasks have very high performance requirements around them … like in an automotive system or a spaceship or an airplane.”

The company is the market-share leader when it comes to heavy-duty systems relating to critical infrastructure, Raj said.

“They’re about 1.5 times bigger than the next-biggest player in the space, and they’ve been around for 30, 40 years,” he said. “So it’s not a new technology. … What’s changed since then, and makes us interested in Wind River now, is basically this concept of IoT, the Internet of Things.”

When the company started out, the various devices running its software had no connectivity. With all those now internet-enabled, Wind River becomes “a very strategic sort of asset, because they sit right in the middle of this work flow.”

The data produced by the nearly two billion devices that use Wind River’s technology is what drove TPG’s investment: “We think there’s sort of a hidden asset here within Wind River that we can really capitalize on as part of a more IoT-driven strategy for the business.”

TPG’s plans for growing Wind River organically include significant investments in the auto and telecom spaces.

The firm will also pursue inorganic growth, something Wind River was restrained from doing under Intel.

Moving “up the stack” into analytics is also a possibility, Raj said, though the firm would have to decide whether to buy or build such capacities.

Action Item: For more on Wind River, visit https://www.windriver.com.

Photo of Nehal Raj courtesy of TPG