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Where cash is not yet king

In deal-making, the appeal of cash is obvious. Cash offers a cleaner exit for investors, particularly foreign ones. It has a value that will not fluctuate the way that stock prices can between when a deal is announced and when it closes.

For companies sitting on large piles of cash, using some of the money for deals makes sense given the low-yielding alternatives.

And a number of American acquirers are stumping up and putting cash on the barrel. Abbott Laboratories said today that it would spend 4.5 billion euros in cash ($6.6 billion) in cash for the drug unit of Solvay of Belgium. Last week, Dell announced that it would spend $3.9 billion in cash for Perot Systems. (Abbott will be left with more than $2 billion in cash on its balance sheet, while Dell will have $9 billion.)

Yet cash accounts for a smaller slice of the M&A universe than it did pre-financial crisis. Cash-only deals by American acquirers account for only 20.3 percent of total merger volume so far this year, according to Thomson Reuters data. That’s 803 transactions representing $93 billion worth of deals. Compared that all of 2007, when 1,919 all-cash transactions accounted for 54.5 percent of total dollar deal volume in the United States – or $796 billion worth of deals.

The guessing game ahead of Dell-Perot deal


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 shows discipline in opting for Perot


– 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. 

Don’t bank too soon on Dell PC refresh


   By Eric Auchard
Dell computers on sale in Beijing computer market   LONDON, Aug 28 (Reuters) – Dell Inc’s quarterly earnings report beat investor expectations that have been repeatedly hammered down. But the computer maker’s celebrations could be short-lived.
   Results for the second-quarter ending in July were buoyed by transient business factors as it continued to lose share in its core PC business. Meanwhile, technology budgets are still being slashed and the company’s business, which depends heavily on personal computers, is unlikely to be an early beneficiary of any corporate spending rebound that could begin in 2010.
   Government computer spending saved the quarter for Dell as public spending surpassed sales to its mainstay large commercial customers for the first time. However, this was largely due to seasonal education demand from state and local governments. Sales to corporate customers and small and medium-sized businesses remained weak, falling 32 percent and 29 percent respectively.
   It is a measure of Dell’s battered condition that a fall in government sales of just 16 percent and consumer sales of 9 percent were seen as positive factors. The Texas company was alone among the top five PC makers to lose market share in the second quarter compared to the same period a year earlier, market research firm Gartner Inc says.
   For the current third-quarter, government spending will have to offset expected weaker corporate spending, especially in the United States and Europe.
   Hopes for Dell’s stock rest on the potential for the next generation of Microsoft operating system software — Windows 7, due out in October — to spur on a wave of computer upgrades next year. The average corporate PC is now 4.5 years old. As PCs represent a far larger chunk of Dell’s sales than for other computer manufacturers, it stands to be the biggest beneficiary of any spurt in new sales.
   But there are doubts whether Windows software has the same pulling power that it did a decade ago in terms of sparking hardware upgrade cycles as corporate buyers control spending more tightly these days.
   Another problem is that corporations and governments will need to put additional computer servers, storage and software in place before any major PC upgrade cycle gets underway.
   CEO Michael Dell is convinced that “a big refresh cycle” is underway over the course of the next year. The question is when: It could be 2011 before any broad PC upgrade begins to flow through into company results.
   Despite all these questions, Dell’s shares are up more than 10 percent after the report. The stock trades at a 15.5 multiple to Wall Street’s 2010 earnings forecasts, in line with the computer hardware sector, but roughly 40 percent higher than multiples of healthier, more diversified rivals Hewlett-Packard <HPQ.N> and IBM <IBM.N>. A big comeback in the company’s fortunes looks priced into the stock.
   Yet Dell still needs a major transformation of its business model to attract more software and services revenue (See July 22 column “A brutal logic to Dell’s reinvention”).
   It must show progress in winning back consumers, while cutting its overall PC exposure before anyone can call Dell a turnaround.
   — 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. You can find some of Eric’s recent columns here. –

(Photo: Reuters/David Gray)

A brutal logic to Dell’s reinvention: Eric Auchard


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

By Eric Auchard

Michael Dell in New DelhiLONDON, July 22 (Reuters) – Dell Inc needs to reinvent itself to cope with falling margins for key products and a spate of mergers which are rapidly reshaping the competitive scene.