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

By D.H. Kass

September 22, 2009

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.

Dell’s plan to meld its manufacturing capabilities with an expanded services business, while not a novel idea, is a proven formula that others have used to arrest sliding fortunes. Chief executive Dell said that the deal is not a signal that the PC maker is de-emphasizing its core business in favor of services but rather a determination to grow both avenues of the company.

In the past four quarters, Dell has posted declines in revenue and profit from the year earlier. In late August, it said that revenue dipped 22 percent to $12.8 billion and profit fell 23 percent to $472 million for the three months ending in July.

While the agreement perks up Dell's enterprise portfolio and strengthens its position in the hotly competitive IT services market, it does not substantially close the gap in services-related sales between Dell and key rivals IBM Corp. and Hewlett-Packard Co.

By comparison, IBM’s Global Services unit maintains some $60 billion in annual sales, and last June, HP buttressed its services organization with a $13.9 billion acquisition of Electronic Data Systems, a deal that could boost its annual services revenue beyond $30 billion.

In recent years, Dell has made 10 acquisitions--most notably its purchase of storage vendor EqualLogic late in 2007 for $1.4 billion—but none carrying the heft of this one or commanding the potential to pave the way for others.

Chief executive Dell said that once the integration of Perot is completed, he “would not be surprised to see other smaller potential acquisitions as a result of this one.”