Eric Auchard

Technology stocks have rallied strongly this year. Major tech indices are up more than 70 percent from March. A big reason for this is that investors are betting that company purchases of replacement equipment will drive  sales and earnings  growth next year.

But while some names such as Microsoft, Cisco and Intel may benefit from product upgrades on a scale not seen since the 1990s boom years, this rising tide will not lift all boats.

That's because the expected recovery in corporate purchasing in 2010 is likely to be selective. While there will be winners enjoying double digit sales growth, many companies will struggle. Not that you would guess that from the way markets are behaving.

Shares in computer hardware, software, network, storage and services stocks have outperformed broader indices two or three times over.

To date, the recovery has been spurred by the restocking of depleted components after last year's sharp downturn. But this has mainly been propped up by stronger-than-expected consumer demand in China, and to a lesser degree, the United States.

Meanwhile, corporate spending has remained weak.

Despite this, tech investors believe that a recovery in corporate purchasing will drive the next leg of the recovery. And the catalyst for this, they hope, will be the planned introduction next week of Microsoft's Windows 7.

There are good reasons to believe this insight may be correct. Many companies have aging machines that are now four or five years old. Having skipped the last version of Windows, known as Vista, they now face a double upgrade to Windows 7 and new PCs.

It is cheaper to buy new machines than fix old ones, which bodes well for beleaguered PC makers, especially Dell Inc, which positions itself as selling PCs that cut overall maintenance costs. It depends on corporate PC buyers to a greater degree than stronger stock market performers Hewlett-Packard and Apple Inc.

But there is a snag. Microsoft is promising to make a switch to Windows 7 its easiest ever, and the downside of this is that it means that there is less need for users to upgrade everything from memory chips to hard disks to printers to make it work correctly. As it is, the portion of inkjet printers sold alongside new PCs has fallen from around 50 percent four years ago to below 30 percent in the middle of 2009. Printer specialist Lexmark, and to a lesser extent HP and Dell, will be hurt.

Major software upgrades typically require users to buy faster PCs ready to run the new features. But the basic requirements for computers to run Windows 7 remain little changed from Vista, making it unnecessary to add hard disk storage capacity. Windows 7 is designed to run more efficiently than Vista with less computer memory. The Windows upgrade won't be the boon to disk drive makers Seagate and Western Digital, nor memory makers Samsung Electronics or Micron Technology the way that such shifts once were.

It is clear that companies are not looking to spend any more money than they absolutely need to. Goldman Sachs quarterly survey of IT spending plans by big companies found that 69 percent still expect "below-normal" spending growth for 2010. The survey of IT decision-makers ranks hardware the second highest priority for cost-cutting after reducing reliance on outside contractors. Forty-five percent say hardware is a top area for potential cuts.

Companies looking to achieve radical cost-savings will stick with older PCs and use so-called virtualization software from VMware, Microsoft or Citrix to upgrade users at far less expense.

While Microsoft in software, Cisco in network equipment, Intel in microprocessors and EMC in storage are expected to return to double-digit sales growth and even rosier profits next year, second-string companies like Lenovo in PCs, Tibco and BMC in software, Nortel and Netgear in networking are set to lose out.

Some of the sectors that are losing out are facing pressures to consolidate. Tighter budgets and falling demand is driving consolidation of storage, networking and computer services vendors.

For the lucky, the next leg of the technology stock rally will be based on the solid fundamentals of improving corporate product demand. The rest must be hoping they can attract a suitable merger partner.

Amazon's bid to offer its wireless electronic book reader in 100 countries gives it an early lead in the race to dominate the market.

Yet while the move could boost the Kindle's share of the emerging eBook business to upward of 70 percent, Amazon faces growing competition, plunging prices and increasingly restive book and newspaper publishers.

As a stripped-down device for reading text and not much else, Amazon's Kindle looks pricey relative to netbook computers with similar price tags of around $200 to $300. And the Kindle's key hardware advantages look increasingly easy for rivals to match and perhaps even overcome.

To be sure, the year-end holiday season looks to become the break-out year for sales of electronic readers. Market researcher Forrester now says it expects 3 million eReader units to be sold in the United States alone in 2009, up from a prior prediction of 2 million.

Forrester expects Amazon to have nearly 60 percent of the U.S. eReader market, roughly twice that of the Sony eBook Reader's 35 percent share. Dutch company Irex Technologies, working in close collaboration with bookseller Barnes & Noble, accounts for the remaining 5 percent.

Of course, Kindle's expansion into international markets stretching from China to Europe should give it an even greater market-share lead worldwide, putting it on a par with Google's dominance of the Web search market or Apple's lead in music players and, increasingly, in smartphones.

The Sony eBook Reader so far is only available in the United States, Canada, Britain and a handful of other European markets. Sony makes a cousin of the eReader in its home market, Japan, called Librie.

But many forces are in play that could make it hard for Amazon to sustain its current momentum.

First, prices are plunging. The start-up Interead has introduced a basic eReader device called COOL-ER Reader that sells for $249. Sony has plans to introduce its Pocket Reader device for $199 in December. Amazon responded by cutting the price of its Kindle 2 reader to $299 from $359 a few months back. On Tuesday, it cut another $40 off the price in the United States.

Amazon provides few details on the costs or sales volumes of the Kindle, but most analysts believe the Kindle business still loses money for the company.

To date, Kindle could boast of a critical advantage over other devices: the capacity to wirelessly download new books or other content in under 60 seconds. Rivals such as Sony's eBook Reader must be synchronized by users with a computer to receive fresh reading material.

But that's changing. Sony has announced two new models for the U.S. market with built-in wireless connections provided by mobile operator AT&T, the same carrier that supplies the Kindle's wireless access.

Irex is also introducing a wireless model. Upcoming eReaders from Asus in Taiwan are expected to have two color screens and open like an actual book. Eventually more flexible, almost paper-like screens should become economical. The problem for Amazon is that many competitors will have access to this technology. This may tempt big players like Apple and Microsoft into the market.

As common standards take hold among publishers of electronic books, it's hard to see how Amazon can continue to command the margins it currently enjoys on hardcover book sales -- triple those of digital downloads. Publishers are unlikely to sit idly by and crown Amazon the king of the eBook trade the way Apple is in music.

The truth is that Amazon is hedging its bets, preparing for the day when selling physical books is displaced by digital media downloads the way MP3s have wiped out CD sales. The online retailer should be congratulated for building what is fast becoming a billion-dollar revenue business, after taking the unlikely role of hardware maker. But, so far, it is hardly a substitute for selling boxes of books.

Let the second-guessing, the mock horror, the disbelief, the crowing begin.

Google CEO Eric Schmidt has acknowledged he realized upfront that he was overpaying to acquire YouTube, to the tune of $1 billion, judged by any conventional measures.

The many critics of Google's $1.65 billion deal to acquire the video-sharing site three years ago will claim this confirms everything they have always said about the deal. Not quite.

In fact, not really at all.

Schmidt came clean in a deposition by lawyers in the Viacom copyright lawsuit that there was very little revenue coming into YouTube to justify the price his company paid.

No surprises here. There were intangibles to consider:

1. YouTube's popularity was sky-rocketing, making it the runaway market leader among video-sharing sites.
2. It was crushing his company's own site, Google Video.
3. YouTube was up for auction and would be sold to a competitor unless Google jumped first.
4. Google overbid to ensure YouTube didn't fall into rival hands.

The Google CEO said he told his company's board of directors that the 18-month-old video-sharing site was worth $600 million to $700 million, according to CNet, which obtained a transcript of his testimony. Of course, he fails to mention the potential costs of copyright lawsuits that already loomed for YouTube.

"In the deal dynamics, the price, remember, is not set by my judgment or by financial model or discounted cash flow. It's set by what people are willing to pay," Schmidt says.

So the real justification for the 150 percent premium Google paid was in derailing, or at least delaying, the rise of a potential competitor. Of course, Google has faced a long struggle to find ways to make advertising work on the site in order to pay the costs of free video. Only last quarter could Google say YouTube would be profitable in the "not long, not-too-distant future."

Of course, all the fuss over YouTube's valuation is not really Google's problem. The real issue is the extrapolation of valuations of all the Web 2.0 companies since then which have used the YouTube price as the benchmark for all the other-worldly valuations of their unproven business models.

Here are the relevant excerpts from Schmidt's deposition by Viacom lawyers, via CNet:

Viacom attorney Stuart Jay Baskin: And what was management's valuation?

Eric Schmidt: Much lower than we paid for it.

Baskin: And how was that communicated to the board?

Schmidt: I told them.

Baskin: So why don't you tell us what you remember telling the board in connection with the valuation?

Schmidt: I believe YouTube was worth somewhere around $600 million to $700 million.

...
Baskin: What methodology did you use to come up with that number?

John P. Mancini, an attorney working for Google, objects.

Schmidt: My judgment.

Baskin: Was it based on cash flow analysis? Comparable companies? What were you using as the basis for your judgment?

Mancini objects.

Schmidt: It's just my judgment. I've been doing this a long time.

...
Baskin: I'm not very good at math, but I think that would be $1 billion or so more than you thought the company was, in fact, worth.

Mancini objects.

Schmidt: That is correct.

(Photo credit: Reuters/Jonathan Ernst)

Microsoft has adopted a tough mantra for an age of austerity, arguing that innovation must take a back seat to cost-cutting and productivity gains when it comes to selling technology.

"Things have come down. I see them staying down and slowly growing," Steve Ballmer, Microsoft's chief executive, said today in a speech to British business leaders.

But does Microsoft's "New Efficiency" slogan describe the future of the technology industry?  Or just the software giant's own subdued outlook?

In recent years, Microsoft has settled into managing mountains of cash and established customer relationships in late middle age. Its share price has also been less than dynamic, down 30 percent since the beginning of 2008.

But instead of making big bets on future growth, Ballmer contends that  innovations must be funded based on their prospects for helping customers become more lean and efficient. The company recently froze funding for research at $9.5 billion -- still the world's largest such budget.

"I believe the new normal requires a new kind of efficiency built on technology innovations that enable businesses and organizations to simultaneously drive cost savings, improve productivity, and speed innovation," Ballmer argued in a manifesto published last week.

Ballmer acknowledges that the "New Efficiency" is partly a marketing message to underscore the potential productivity benefits of Microsoft's upcoming products -- the next version of its operating system Windows 7 and Exchange Server 2010.

Microsoft suffered its first-ever drop in annual revenue during its fiscal year ended in June -- a decline of 3 percent. Wall Street forecasts revenue growth of just 1 percent in revenue for fiscal 2010 and flat to modest growth of 5 percent in profits in the coming year.

But the company insists that there is a silver lining in its new focus. Refocusing technology innovation around efficiencies can help job growth, taxes and the creation of small businesses, Ballmer says.

Microsoft recently commissioned market research firm IDC to study how spending on technology and jobs compare with the economy at large in 52 countries around the globe.

Technology spending in the European Union is forecast by IDC to grow by 2.1 percent and employment increasing by 559,000 jobs between 2008 and 2013. By contrast, overall gross domestic product and employment in the EU is set to decline slightly.

The IT sector will create 5.8 million jobs worldwide over the next four years. Even in the European Union, where economies are still in decline, technology spending is set to rise and create more than half a million jobs by 2013.

Still, there will be no more innovation for its own sake, Microsoft says. New technologies will be funded from savings wrung out of less efficient ways of doing things or they won't survive.

Microsoft's message is in tune with times of slumping economic growth and organizational budget-cutting. But it is also a convenient one for a company that may have run out of disruptive new ideas.

You can read some of Eric's recent columns here.

(Photo credit: Reuters/Eric Auchard)

 So much for emerging-market solidarity.

A proposed $24 billion deal between Bharti of India and MTN of South Africa has fallen apart, not for the usual issues of price or control, but national ego.

The apparent sticking point was that South Africa was eager to retain MTN's national character and had approached Indian authorities to consider a dual-listed entity, a structure that Indian laws currently do not allow.

The opportunity for a landmark deal in southern economic cooperation, one that would have created the third-largest wireless operator in the world, looks lost. After several failed attempts, it is the credibility of their respective governments, not the companies themselves, that is left in doubt.

The message from the South African government is that international buyers can invest in, but not control, the country's companies. UK mining conglomerate Xtrata has been a two-time loser there, having abandoned a takeover plan for Lonmin Plc, then met with roadblocks in its offer to buy Anglo American.

India has been more than willing to help its biggest companies push onto the multinational stage in cars, steel and technology. But international companies looking to buy into India have received rough treatment as well.
  
Every country seems quite happy to have their companies do the buying, but no one wants to see its national heroes sold.

Western countries have used a mix of justifications, from competition to national security, to torpedo attempts by China to buy such prized assets as Rio Tinto or Unocal. The French went as far as to declare yogurt-maker Danone a strategic asset to block a takeover by PepsiCo of the United States.

Beyond the mutual recriminations between Bharti and MTN and their respective governments, the question now is what happens next. The two companies left open the possibility they might find a way to resume a deal. But recent history is not promising.

Bharti and MTN revived talks four months ago, a year after previous negotiations broke down over which executive team would control a merged mobile phone giant with more than 200 million customers across India, Africa and the Middle East.

Bharti could accomplish some of what it is after by stepping into the bidding for rival African and Middle East player Zain of Kuwait. But this has its own political and financial hurdles.

MTN's options look less promising. A foreign buyer seems like wishful thinking now. The No. 2 South African mobile phone company may have to content itself with the rapid growth taking place in its African and Middle East markets. The South African government is happy to allow it to diversify offshore.

But the road to south-south economic cooperation has been shown to be rockier than the tentative Bharti-MTN deal had promised.

You can read some of Eric's recent columns here.

(Photo credits: Reuters/Mike Hutchings, Reuters/Ajay Verma and Reuters/Mike Segar)

The U.S. computer services industry is back in favor, after a decade of struggling to cut costs and compete with offshore firms from India and elsewhere. At least that would be the obvious conclusion to draw from a recent string of multibillion-dollar deals.

Xerox has agreed to buy Affiliated Computer Services for $6.4 billion while Dell is paying $3.9 billion for Perot Systems. They are picking up where Hewlett-Packard left off when it paid $13.9 billion to buy Electronic Data Systems in 2008.

But what's driving these deals is not a bet on the improving growth prospects of the services industry. Instead, the buyers value computer services companies more as sales pipelines for their own products.

Take Xerox, which has struggled for years to move beyond copiers. The idea now is to manage information in both printed and paperless form. ACS is a leader in processing health claims and student loan payments for governments. It helps commercial clients cut the costs of payroll or human resources processing.

So don't think of this deal in terms of the traditional revenue synergies used to justify technology mergers. It's about helping commercial and government clients cut costs, a tight margin business in the best of times.

For while demand for services has stabilized as the economy recovers, there's little sign of any broad-based growth surge returning. There's no end to the need for services firms to continue to restructure, replacing labor in high-cost markets with technically savvy workers in lower-cost ones.

The computer services market is defined by its two poles: At the top, IBM is the model of the globally integrated services firm that can supply hardware, software and low-cost labor as needed. Rising up are such aggressive Indian software services firms as Infosys, Tata, and Wipro and smaller players in other low-cost nations, including China and Eastern Europe.

Yet times are tough, even for the upstarts. Indian services firms that enjoyed revenue growth north of 30, 40 or 50 percent earlier this decade now face growth of 5 to 10 percent. IT budgets have dwindled and cost control is the order of the day.

Caught in the middle are the services firms that have failed to adopt new labor-saving technology and offshore service delivery. ACS, Perot and to a lesser extent EDS were all slow to embrace the offshore trend. While each has belatedly moved to expand overseas in recent years, this is not their strong suit. Instead, all three have increased their share of the market for politically sensitive federal, state and local government contracts.

Even after the recent mergers, deal-making in the sector is far from over. Big names like Accenture, Computer Sciences Corp and Cap Gemini remain in play, as do dozens of niche players in services like payroll, data center automation and healthcare information.

Who might be on the prowl? Dell, for one, has said Perot is only a start, and it will still be sitting on a cash horde of $9 billion. Xerox, on the other hand, says ACS will be its one big deal. IBM, as the market leader, can afford to be opportunistic here, but could be barred for antitrust reasons from mega-deals in the sector.

Look for other buyers to emerge from hardware and software vendors like Oracle or even deal-shy SAP.

It's hard to see intra-industry consolidation, say a merger between Accenture and CapGemini. And Indian services companies have shown themselves reluctant to overpay for services consultants they will likely replace with their own lower-cost workers.

But never underestimate the capacity of desperate companies to do desperate things.

You can find some Eric's previous columns here.

(Photo credit: Reuters/Catherine Benson)

BlackBerry-maker Research In Motion is a victim of its own success. Having dominated the market for corporate e-mail devices for years, it is being forced to seek out growth in consumer markets, where, so far, it has had trouble differentiating its products.

Going mainstream has helped vastly expand its consumer base -- which now represents half of all BlackBerry subscribers. Fully 80 percent of its new subscribers now come from outside its traditional corporate base.

But that success is coming at a growing cost to the once lofty average selling price of its phones, the latest quarterly results show. Profits for its second fiscal quarter dipped 3.5 percent, amid weak subscriber growth. Product prices appear under pressure at both ends of its business, both among corporate users and with consumers.

Fixing these issues will take time, several quarters at least, something which investors who have bid the stock up more than 100 percent in the past year were not prepared to hear: they sent RIM stock tumbling 17 percent, to below $70, on Friday.

The trouble is that RIM must develop and introduce new products that can recapture customer attention in increasingly crowded markets. Phone companies must be convinced to sell the new BlackBerrys in their stores. Consumers must get the message. Rivals have to be kept at bay.

And RIM no longer has the luxury of retreating to its corporate base. There has been a proliferation of rival devices from the Apple iPhone to newer phones from HTC and Motorola based on Google's Android operating system, all of which now offer customers secure access to Microsoft Exchange e-mail and contacts.

The company is desperate for a hot new product to replace its three-year-old Pearl phone, its first device to make a splash in consumer markets. Its standout keyboard for text input is less special than it once was. Rival mobile phone makers offer better cameras, more memory and a wider selection of zippy software for their devices.

But Research In Motion has a plan that involves more than just waiting for the global economy to recover.

A solid step in that direction is the new low-cost Curve, which offers many of the features found in pricier smartphones. It has seen early success in the United States and Europe convincing phone operators to market it to teenagers. This mass-market device is an example of RIM's land-grab strategy in action. It won't improve RIM's finances any time soon, but the goal here appears to be market share.

Rather than trying to always be first to lead with cool new features, RIM's contrarian theory is that by building products that handle data more efficiently, they are more likely to become the preferred devices sold by network operators. It's akin to the strategy that made BlackBerry so popular with corporate technology managers.

Another part of its strategy, no doubt egged on by the success of the iPhone, is to improve not just how its phones make use of the Web, but the basic software that defines what users see and do on BlackBerrys, says Ben Wood, a mobile device analyst with UK-based CCS Insight. Toward this end, RIM acquired Torch Mobile, the maker of an innovative Web browser for mobile phones, in August.

The problem is that -- in a bid to grab market share from rivals like Apple and Nokia -- RIM says it must accept far lower average selling prices on its phones than when it was known mainly as the preferred supplier of secure corporate email.

This strategy will take time -- not a few quarters, but years to play out. RIM effectively is asking investors to have faith that it can repeat its miraculous rise in the corporate e-mail market, only this time in fickle consumer ones.

You can read some of Eric's recent colums here. 

(Photo credit: Reuters/Mike Cassese)

Depending on what measures you use, the personal computer industry either is on the cusp of another Golden Age or in a downward spiral. From a financial point of view, the latter is more accurate.

Sector enthusiasts point to PC sales by volume bottoming out this month or next after a steep, year-long downturn. Gartner Inc this week revised its 2009 PC shipment forecast to 285 million units, an annual decline of 2 percent. That's a big improvement over the research group's gloomy January prediction of a 12 percent drop.

The October launch of Microsoft's Windows 7 operating system could spur many buyers to replace aging PCs. Now Wall Street has become increasingly bullish on PC stocks it believes will benefit from a surge in corporate orders that has not been seen since the industry's glory days in the 1990s.

But growth in unit sales cannot disguise shrivelling revenues brought on by plunging prices.

Hewlett-Packard Co illustrates this paradox. HP's Personal Systems division, which accounts for a third of its sales, enjoyed a 2 percent rise in unit sales in the three months to the end of July as it gained market share on its closest rival, Dell Inc.
  
Nevertheless, the PC division's revenues dropped 18 percent year-to-year. Margins fell by one-third to 4.6 percent of revenue. The economy is only partly to blame for this decline. Its PC business is increasingly a prop to sell other hardware, software and services.

JPMorgan analyst Mark Moskowitz estimates that revenues for the PC market in 2011 will only barely be at 2007 levels, even though the industry will sell 100 million more units. This is largely down to the popularity of ultra low-cost netbooks. Sanford C. Bernstein estimates that netbooks can probably serve the needs of at least 50 percent of PC users, undercutting the need for more expensive machines.

A man tries the Acer Aspire One netbook at a computer mall in Taipei September 8, 2009.

Desperate to preserve profit margins, many PC makers are experimenting with free software and also alternative microprocessors from alternative suppliers such as AMD or ARM. Even if they preserve margins, the pool of profits is shrinking, forcing computer makers to expand outside of PCs. These deflationary trends are only likely to accelerate in coming years.
  
We increasingly think of computers in terms of the tasks they perform, rather than as boxes. Instead, the value in technology has shifted into networks, software, storage and semiconductors. More people already reach the internet on phones than on PCs.

Intel, the maker of the microprocessor chips that serve as the brains of most PCs, acknowledged that reality this week when it said it was expanding efforts in other markets to offset its maturing PC business. These include phones, software, industrial electronics and consumer gadgets.

Computers are everywhere these days, in all kinds of products from cars to refrigerators to phones to TVs. But they are increasingly invisible commodities. As such, the days of the computer box industry are ending, whatever the latest PC shipment figures say.

(Photo: Reuters/Nicky Loh)

In 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.

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

LONDON, 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 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)