At least a couple market analysts seem concerned about Dell’s ability to integrate and absorb its announced acquisition of Perot Systems and the 23,000 employees that come with it.
Credit Suisse’s Bill Shope says:
“Perot’s 23,000 employees represent a formidable integration challenge for Dell, and we are concerned with Dell’s limited acquisition track record.”
He also has reservations about how the acquisition might affect broader restructuring at Dell, particularly the company’s ongoing efforts to lower operating expenses. Says Shope:
“In particular, we believe Dell’s key challenge will be to prevent its operating expenses from ballooning as revenues recover in 2010. We fear that the additional burden of integrating a large services asset will add risks here.”
Jason Noland of Robert W. Baird shares Shope’s concerns about the integration challenge for Dell, noting that Dell has never digested an acquisition this big.
I want to issue a couple rebuttals.
First, I think these comments represent the myopic quarter-to-quarter mindset that preoccupies many in the analyst community. Rather than considering the big picture and Dell’s long-term viability in a market that is undergoing dynamic change, they worry about whether Dell’s operating expenditures will suffer a short-lived spike as the company assimilates an important acquisition. It’s an incredibly short-sighted view, one that misses the point behind the acquisition.
I’ll be blunt: Dell could not stand still. It had the choice of going deeper into consumer markets or strengthening its enterprise offerings. It would have been a dire mistake for Dell to plunge deeper into consumer markets. The company not only derives the majority of its revenue from sales to enterprise customers; it’s also more comfortable dealing with business customers and more responsive to their needs.
Conversely, Dell isn’t a brand prized by consumers. It’s just had too many misadventures and missteps dealing with them. There’s no reason to believe Dell buying Palm, for instance, would end any differently from 3Com’s disastrous stewardship of Palm back in the 1990s. When one also considers that the consumer market is no panacea for magical growth in the foreseeable future — unless your corporate moniker is Apple — Dell really had no choice.
At the end of the day, a company has to be true to itself.
One might reasonably object to the price Dell paid for Perot, but it’s harder to make the case that Dell shouldn’t have pulled the trigger on exactly this sort of move. With the strong services foundation Perot will provide, especially in its core healthcare and government markets, Dell now can buy and build additional products and services that can be sold into those markets. The Perot acquisition forms a cornerstone on which Dell can build higher-margin value propositions for enterprise customers, above and beyond the sale of PCs and servers.
The other objection raised by analysts is that Dell might struggle with the integration of Perot. That’s always a possibility, not just for Dell but for many other companies besides.
Even so, I am reasonably confident in Dell’s ability to make the integration work. Dell has cut its teeth on small acquisitions in preparation for a bolder move. More to the point, it has brought aboard personnel who are adept at closing, integrating, and fully assimilating major acquisitions.
Among them is David Johnson, Dell’s senior vice president of corporate strategy (or head of corporate planning and development, depending on whom you ask at Dell and the circumstances in which you pose the question). He was formerly an M&A executive with IBM.
Many of you will recall that Johnson was the subject of a fierce and litigious tug of war between IBM and Dell. That battle is ongoing, which is why Dell was adamant that Johnson was not involved with the Perot acquisition.
Okay, he might not have been involved, literally and technically, in the acquisition of Perot; but I strongly suspect he will be closely involved in the integration of Perot into Dell. Notwithstanding Dell’s legalistic and semantic tap dancing, Johnson figures to be in the integration mix, as do others Dell has brought aboard to see through exactly this type of transaction.
In summary, Dell isn’t exactly the acquisition ingenue that some analysts believe it to be.