Dell Tips Hand on Further Acquisitions

Eponymous CEO Michael Dell blitzed through the rain-soaked Bay Area yesterday, speaking at Oracle OpenWorld and to a Churchill Club audience.

On the whole, Dell’s remarks were neither as stridently partisan nor as frankly provocative as those Larry Ellison made to the same audiences recently, but he still offered a few comments worth parsing.

Dell’s disparagement of netbook computers captured considerable media attention. What he said is basically true: Today’s netbooks generally don’t possess the display size or performance characteristics to qualify them as replacements for full-fledged notebook PCs. That’s convenient for Dell, of course, because the profit margins on sales of netbooks fall well short of those attributable to notebooks.

Dell sells netbooks, but the company is positioning them as computers one would buy if one has never owned a computer before or can’t afford a more-capable system. I think Dell sees the netbook primarily as a developing-market play.

One of Dell’s other comments was potentially more revealing. Referring to the role of the server in the data center, he said the following:

“A lot of what goes on in the data center is being gobbled up by servers. We see switching, for example, rapidly collapsing into the servers. You’ve got virtualized switches, but even the switches that aren’t virtualized — they’re now sitting inside blade chassis.

Not that long ago, it looked like intelligence was getting sucked out of the server and it was going somehow into the network, but actually now it looks like it’s going the other way. The server is becoming the epicenter of the data center, and you’re seeing the switches get embedded inside the server. I’m sure there are plenty of other opinions out there.”

Yes, there are other opinions. Cisco might argue that the chassis switch is subsuming the server, and that the network retains considerable intelligence. Irrespective of whether one asserts the primacy of one over the other, though, both companies are arguing that servers and networks are converging in the data center. That has interesting implications for Dell’s strategic direction.

Based on what Dell has said regarding the server as the epicenter of the data center — with switches embedded inside the server — one can justifiably extrapolate that it’s only a matter of time before Dell gets into the networking game, likely with blade switches for its own servers.

The question then arises: Where does Dell get that functionality? An acquisition (or acquisitions) seems the likeliest option. I’ll look at Dell’s potential networking moves in a subsequent post, considering both its current partnerships and how receptive certain vendors might be to an acquisition.

On the topic of acquisitions, Dell said his company will be “reasonably active,” is “rapidly developing” merger expertise, and is seeking more deals as part of a turnaround plan. The company announced its $3.9-billion takeover of Perot Systems Corp. last month, and will presumably take a bit of time to integrate that acquisition properly before making another sizable buy.

Nonetheless, Dell indicated further acquisitions are coming. Dell will look at acquisitions that bolster sales to corporate customers and will consider more purchases in the healthcare industry.

The corporate focus – Dell derives more than 80 percent of its revenue from enterprise customers – is the right one for the company. As for healthcare, it is Perot’s strongest vertical, ripe for government-subsidized automation and technological upgrades.

Said Dell:

“When you look at the health-care space, it’s the one sector of the economy that has the least amount of IT, and we see it as very promising for growth. There’s usually more technology at the grocery store than there is at your doctor’s office.”

Dell sees electronic medical records (EMR) as a potentially compelling application for software-as-a-service (SaaS) delivery. He must also be encouraged by US-government stimulus spending on healthcare, with about $20 billion pouring into healthcare information-technology initiatives.

That’s promising for Dell, as is the long-awaited refresh cycle for enterprise servers and desktops. Dell sees the server refresh occurring now, and he believes PC upgrades will commence in 2010.

On the refresh cycle, Dell said:

“I think there’s a powerful refresh cycle coming. It won’t come all at once, but we believe it’s going to happen as we get into the early part of next year on the client side–on server side it’s already started.

The average client device in business is running Windows XP, but that’s an eight-year old operating system. If you get the latest processor technology and Windows 7 and Office 2010, you will love your PC again, and we have not been able to say that for a long time–it’s a dramatic improvement in performance and capability.”

Dell might be asking too much. It’s one thing to call for an operating-system upgrade, which seems inevitable in light of Windows Vista’s market travails, but it might be a bridge too far to insist that enterprises also make an immediate switch to Office 2010. Microsoft might like the sound of those words, but I suspect corporate bean counters will be less enchanted.

What about Dell’s smartphone? Everybody, it seems, wants to know whether it’s got a future. It is being proffered by Dell’s consumer division, which, at first blush, might seen counterintuitive. After all, Michael Dell has said the company’s strategic focus, and its future acquisitions, will occur in the enterprise space. What’s up with a smartphone for consumers?

Remember, however, that Dell’s smartphone, the Dell Mini 3i, hasn’t come to America yet. Running the Android-based Open Mobile System (OMS) for China Mobile, the Mini 3i is carefully positioned to tap a unique opportunity, predicated on partnerships and customized content. It’s not a template for success in the USA or Europe, but Dell will take it, and perhaps run with the same approach in other developing markets.

Dell seems set on taking a modified version of its Android smartphone into the American market in 2010, but I think the company would be well advised to adopt an entirely different approach, better aligned with its enterprise strategy, in developed markets.

Although Dell sounded modestly optimistic notes on the global economy — saying a nascent recovery in the USA is several months ahead of developments in Europe — he also emphasized that Dell would continue to pursue cost cuts.

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