Dell announced this morning that it has pulled the trigger on a $3.9-billion acquisition of Perot Systems. Some observers think Dell is overpaying for Perot, whose revenues have been falling. It’s true: As a standalone entity, judged on earnings per share and business fundamentals, Perot isn’t worth the premium Dell has offered.
Still, it’s important to understand the Perot acquisition as a strategic necessity for Dell. It’s also important to consider that Dell will add incremental product sales through Perot’s accounts. Those product sales will include not only the PCs and servers Dell markets today, but also the products and technologies it will add through further acquisitions.
Strategically, Dell had two broad choices: It could go deeper into consumer products, from which it currently derives approximately 20 percent of its revenue, or it could strengthen its enterprise offerings. It wisely chose the latter.
After it has integrated and digested Perot, Dell will have a real services organization — with a stable of paying customers — that can do more than install and support PCs and servers. At that point, Dell can look at acquiring enterprise-oriented software companies whose products fit Perot’s sales-engagement model and target markets.
So, Perot helps Dell achieve an important objective, though at considerable cost.
Even with the Perot acquisition, Dell’s services division will be significantly smaller than IBM’s or HP’s. Where those organizations can go broad and deep, technologically and in terms of the vertical markets they serve, Dell will take a different approach.
Perot derives nearly half its revenue from the healthcare sector, with another 25 precent coming from the government sector. As part of its stimulus spending, the Obama Administration is pouring money into healthcare to expedite the digitalization of medical records. With Perot in hand, Dell expects to tap into some of that largesse. (The companies already had a healthcare-related partnership pertaining to electronic medical records (EMR). This acquisition could be read as a sign that the partnership was bearing fruit).
Similarly, the Obama Administration has mandated that federal governments update and upgrade their IT infrastructure. Again, Dell hopes to leverage Perot to get at that business.
In acquiring a services company that is positioned to benefit from government-stimulus funds, Dell seems to be acknowledging that following government money is a better near- and intermediate-term strategy than trying to benefit from what might be an invisible recovery in the private sector. Publicly listed companies that have managed to produce earnings this year invariably have done so on cost cuts rather than on revenue growth. Speaking of which, Dell also foresees “efficiencies” deriving from this deal.
Some detractors are criticizing Dell for buying a services firm with such a heavy dependence on two vertical markets. Actually, I think Dell saw the same thing as a positive, not a negative. Dell believes healthcare and government have money to spend, unlike many other industries that are reducing expenditures.
The move also signifies that Dell will not be making a high-profile acquisition in the consumer space. Don’t expect Dell to reach into its pocket to buy, for example. Palm. That’s not likely to happen unless Michael Dell loses his mind.
Instead, you might see Dell follow this acquisition with purchases of companies involved in information management and storage. Healthcare organizations and government departments are bureaucracies that produce copious documentation. Consequently, they have an ongoing need to efficiently manage and store documentation.
Obvious Dell acquisition candidates include CommVault, with which Dell has an OEM partnership, and GlassHouse Technologies, which also partners with Dell. Given the vertical-market orientation of Perot, Dell also might take a serious look at file-virtualization technologies.
Dell will want to push more than PCs and servers into the Perot installed base. Further acquisitions are sure to follow.