The guessing game ahead of Dell-Perot deal

September 22, 2009

Dell Perot puzzle pieceIn retrospect, it’s easy to say we could have guessed it:

Why didn’t some investors put 2+2 together and figure out that Perot Systems might be a target for Dell — before that is, Dell announced its $3.9 billion cash deal to buy Perot.

Looking back at Perot’s share performance, the stock has been building up momentum since July, despite warning of weak earnings in its August 4 quarterly report. The stock, which traded under $15 throughout the first half of the year, had built to $18 by last week. Perhaps this was early optimism about 2010 prospects. But the other explanation is some timely speculation that Perot was a logical target for fellow Texan company Dell.

Dell had made little secret of its plans to acquire computer services and software companies for months. Executives had dribbled out hints about what kind of targets it was after in the weeks and months leading up to the September 21 news.

Belatedly, it’s interesting to go back and read the dialogue at the Citigroup conference presentation on September 9th between Dell computer services chief Steve Schuckenbrock and a Citi analyst. It reads like the parlor game “20 Questions.” The following is an unedited transcript from ThomsonReuters SteetEvents:

Citi host: On the one hand, I’ve heard Dell executives say that they want to acquire a services company that’s large enough that you could reverse integrate your existing services business into whatever you acquire. At the same time, I think you’ve said repeatedly that you don’t want to acquire a body shop. You want to go to where the puck is going which is more remote resolution and services and software if you will. So how do you reconcile those two statements?

Schuckenbrock responds by describing what Dell thinks is wrong with big computer services companies before he comes around to describing the sorts of assets his company is after.

Schuckenbrock: Data center capacity is still required because that software as a service runs someplace. There’s lots of services that do require capacity — secured, well run infrastructure on behalf of customers whether it’s backup, recovery, archiving, whatever the case might be that does require a certain expertise around operations of data centers, certain amount of capacity that comes with that as well as the arms and legs to help customers with the implementation and transition from the legacy environments of managing their data centers to the future. That requires a certain amount of scale and capacity that is probably best done non-organically.

Citi: Well it actually — it sounds like you are looking for sort of an IT outsourcing company then?

Schuckenbrock: No, not particularly.

Citi: I guess I’m even more confused now.

In retrospect, it’s easy to read back in how Perot could fit the bill: 1. Not too big; 2. with data center capacity; 3. Some outsourcing capacity, but not overly so. 4. Located just a few hours away from Dell HQ.

Perhaps someone holding the stock put 2+2 together after hearing the Citigroup exchange. Perot Systems stock has bumped along for four years in a purgatory mostly between $12 and $15, ticking up to $18 only at the best of times. It’s not widely followed by many analysts on Wall Street. Maybe someone smart was paying attention. Weren’t Dell’s intentions practically hiding in plain sight?

Taking a more conspiratorial view, the trading blog Zero Hedge points to what appears to be unusual activoty in Perot Systems options in the week before.

More than 2,500 Oct $20 calls were purchased for around $1, the pseudonymonous collective known as Tyler Durden says. The post estimates someone booked a not-so-tidy $2.2 million profit from options purchased over four days starting September 15.

It seems a pretty obvious case for the SEC to chase down. So easy.  So obvious, that it stopped to make me consider the more innocent alternative.

I like my conspiracy theories simpler. The Wall Street Journal has a nice standback piece asking whether faltering Perot finances forced the family to sell.

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