Dell shows discipline in opting for Perot

September 21, 2009

– Eric Auchard is a Reuters columnist. The opinions expressed are his own –
  
By Eric Auchard

Eric AuchardLONDON, Sept 21 (Reuters) – Dell Inc has made a solid move into computer services by buying Perot Systems, even if the hefty price Dell is paying is hard to justify on Perot’s standalone prospects alone. 

And the price looks very rich indeed.  Dell is spending nearly $4 billion in cash — a premium of 68 percent to Perot stock’s recent close — to buy a slow-growing U.S. computer services firm focused on health care and government clients.
  
That’s 1.4 times Perot’s expected 2010 sales, or roughly two times more than rival Hewlett-Packard paid when it acquired EDS in a $13.2 billion deal last year.

But the Perot deal is best understood as arming Dell with a sales force to push its broad computer hardware lines and expanding software and services offerings out to healthcare and government customers. The acquisition lets Dell neatly expand into these markets without indulging in mega-dealmaking of the sort it has no history doing. And Dell will still be left with $9 billion in cash for any additional deals.

Electronic Health Records also promise to fuel growth for Perot Systems health care consulting practice

Electronic health records are key driver of Perot Systems growth

Acquiring Perot’s Web hosting and remote services businesses fills a missing link in Dell’s strategy to deliver software-based services remotely rather than more costly labor-intensive ones.
  
Dell’s current services businesses generate $5.7 billion a year, two-thirds of which is technical support for Dell hardware clients. Of the remaining one-third of Dell’s services business, most is made up of managed network services, and the stub is for consulting.
  
These are areas where Perot gives Dell a leg up. In return, Dell provides a pipeline of business with global customers that Perot is only starting to try to tap.
  
Perot Systems represents a big bet by Dell on the growth of the health care information technology business, which produces half of Perot revenues, and government work, roughly another 20 percent or so of sales. These are growth markets, however the debate over President Barack Obama’s national health care plan ends up.
  
And for a company founded by Ross Perot Sr. — a former U.S. presidential candidate known for his strong views on job losses to Mexico — Perot Systems has increasingly had a global focus.
  
Perot has been investing heavily in India, its biggest employee base outside the United States, which still accounts for 87 percent of its business, and more recently in China, where it has won promising business contracts. (Perot Sr. controls a quarter of the company’s shares and stands to take away more than $1 billion from Dell’s offer, while his son, Ross Jr., now serves as active chairman.)
  
The short term is not as promising: Perot sales are poised to decline 9 percent in 2009 over last year, while profits remain flat. But fortunes are expected to rebound in 2010, when analysts expect 9 percent growth in sales and profit.
  
Buoyed by health care reforms, electronic health records and other moves to use technology to wring efficiencies out of government and commercial health organizations, Dell says it sees plenty of growth potential.
  
Dell should be congratulated for avoiding many of the integration headaches of buying a broader-based computer services companies, many of which remain weighed down by huge staff headcounts in the face of low-cost competition from offshore services firms. I wrote in July of Dell’s wider services strategy in a column entitled ”A brutal logic to Dell’s reinvention.”
  
Shortly after acquiring EDS, HP set in motion plans to cut 24,600 employees, or more staff than Perot Systems employs across its whole company. Acquiring EDS has diminished HP’s ability to do new deals for the time being.
  
Dell can also find ways of wringing further costs from Perot, but the deal is more about expansion than simple merger synergies.
  
Most important, buying Perot keeps Dell’s powder dry for further acquisitions to fulfil its stated strategy of expanding into services and software makers from its base in computer hardware. It can pursue other mid-sized and smaller deals and have cash left in the bank.

– At the time of publication Eric Auchard did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. –

For previous columns, go to http://blogs.reuters.com/eric-auchard/

(Photo credit: REUTERS/Hyungwon Kang)

2 comments

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Once again, Dell plays follow the leader. HP bought a Plano-based services company, so Mikey did too.

Wrong. Buying Perot is an error made in desperation. It will fail.

Dell rode the PC curve not as a technology company, but as an efficient commodity assembler, marketer, supply chain optimizer. One can only grow such business for so long. Because real technology company can always defeat you in a number of ways – new inventions in HW and SW not available to Dell, more efficient distribution of manufacturing for new products. Expansion of product lines which yield higher profits. Witness HP winning the game long term.

A company like Dell, so focused on commodity and assembly, will fail when taking on technology services. Very very companies can make the combination. IBM, HP are just about it. None in Japan, Taiwan, Europe, and no other in US. Because successful technology service require a whole new culture, business model – new kind of people.

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