Dell Expands IT Services with $3.9B Purchase of Perot Systems

Deal could save PC maker $300 million in overlap expenses

September 22, 2009

D.H. Kass

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Dell Computer Inc. said that it will buy Perot Systems Corp., a Plano, TX-based IT services provider, for $3.9 billion or $30 a share, making good on an earlier pledge to grow the company through a large strategic acquisition.

The computer manufacturer said it expects to close the deal by the end of January and will fund it with existing cash. Dell recently reported $12 billion in cash on hand and $3.4 billion in long-term debt.

Company officials said that Perot will function as a Dell business unit called Perot Systems, a Dell Company, and will operate from its current location. It will become Dell’s flagship services unit, headed by Peter Altabef, the company’s current president and chief executive. Dell said it has entered into long-term contracts with Altabef and key members of his team to retain their services.

The $30 per share offer is a 67 percent premium on the closing value of Perot’s shares as of last Friday, echoing the significance Dell has placed on expanding its services business.

Michael Dell, the vendor’s chief executive, called the acquisition a “logical extension” of the existing relationship between the two companies, a collaboration that--backed by the federal government’s stimulus bill—recently produced the joint delivery of virtualized IT solutions for hospitals, health systems and physicians.

Ross Perot, Jr., Perot chairman, said that the deal “formalized a relationship that has flourished for some time.” He characterized it as a necessary step to bring Perot’s IT services to customers it could not reach on its own.

Both companies touted Dell’s ability to reach a wide expanse of customers worldwide with its direct sales model, leaving open the question of what, if any, role Dell’s channel partners might play in developing or delivering IT services from the combined companies. A certified set of Dell’s channel partners sell its managed services platform but that is no indication of future participation in this deal.

The combined companies give Dell a services business with about $8 billion in sales, $2.6 billion of which is supplied by Perot. Of Dell’s current services revenue less than 10 percent is generated by consulting activities, with 70 percent coming from support services and the remainder from maintenance contracts.

Brian Gladden, Dell senior vice president and chief financial officer, said that including Perot’s $8 billion backlog of future contracted business, the acquisition “elevates our combined enterprise and services revenue to about $16 billion.”

He said that the two companies have determined projected sales targets but declined to state those figures publicly.

Deal could save Dell money

The economics of the deal--when fully integrated--could enable Dell to trim some $300 million in expenses from its ledger, Gladden said.

“We have about $4 billion of shared annual spending,” he said. “By combining data centers, infrastructure, development and streamlining services delivery there is a significant opportunity to capture cost synergies of 6 to 8 percent.”

Altabef said that Perot’s strength lies in the healthcare market and public sector.

“We work with about 1,000 hospitals globally, directly with about 30,000 physicians and indirectly with about 200,000 physicians,” he said. “We are the largest IT services provider for hospitals and our physicians’ practice is growing expansively.”

Chief executive Dell said that while the PC maker maintained a “pretty considerable” share in the public sector it did not hold a similar position in the healthcare market.

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TAGS: services,IT,Dell,Enterprise,Perot Systems

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