Dell's $3.9bn acquisition of Perot Systems gives the company a better foothold in the IT services market, but it is really just the beginning. Dell's purchase of Perot Systems is a down-payment on the company's big plans to transform its business.
Dell is paying $30 (£18) per share for Perot Systems, which is heavily focused on the only two industries growing these days — healthcare and government. Perot and Dell had been long-time partners.
Dell had been talking about diversifying away from its core PC and server businesses for months, but the Perot purchase is the first move that illustrates the company is serious about its transformation.
Chief executive Michael Dell said on a conference call that the Perot purchase is a platform the company can use to acquire more companies. He said it will look for more deals similar to the EqualLogic purchase.
Dell also said the two companies would be able to grow faster combined. "We will leverage Perot's services capability across Dell's customer base," he said. "This acquisition makes great sense."
Indeed, Dell is certainly focused on making sure the Perot integration goes smoothly. Perot chief executive Peter Altabef will head a services unit comprised of joint Perot-Dell services units.
And the two companies — both from Texas but about 200 miles apart — hope proximity can make any integration smooth (even though about a third of Perot's employees are in India).
Perot and Dell have partnerships for financing and targeting verticals such as healthcare (48 percent of Perot's annual revenue) and government (25 percent of sales). Combining the companies was the best move to further the relationship, said Dell.
Officials said Perot is one of the largest IT services providers to hospitals and physicians. President Obama has made healthcare IT a big focus to slow the rate of increasing costs.
However, there is an increased degree of difficulty for Dell. Perot has 23,000 employees. Altabef said he was "personally committed" to the deal and Michael Dell said that there is a good cultural fit between the two companies. That cultural fit — not to mention retention packages — will keep Perot talent on board, executives said.
Deal about growth
Dell chief financial officer Brian Gladden noted that Perot "is a great anchor acquisition for Dell" and its platform can be applied to other industries.
Gladden said "growth is the primary motivation for this transaction".
Aside from utilising Perot's foothold in healthcare and government agencies, Dell said the two companies can grow faster and build "next-generation capabilities".
Dell added that Perot can enhance the company's ability to bring next-generation datacentre and virtualisation capabilities to customers. Think of the deal as one big cross-selling proposition. Dell can leverage Perot's healthcare and government customers to sell more hardware. Perot, which only has 27 percent of its revenue tied to commercial accounts, gets Dell's enterprise heft.
The big question is whether Dell can take Perot's capabilities and extend them to other industries. If it can, Dell may succeed at delivering the growth it is hoping for.
While Dell's plan for Perot Systems looks good on paper, it will remain a small services player relative to larger rivals.
Dell said it can bolt together Perot's services business with its own and create a global service company. However, today the Dell-Perot services business is an $8bn unit. "We can make a different services company with a new set of capabilities," said Dell.
Dell will have to deliver new capabilities if it is to enter the big leagues in services. For instance, IBM's global technology services unit had $39.3bn in revenue in 2008 with its global business-services division delivering sales of $19.6bn. As a result, IBM does not have to rely on its hardware business as much as Dell does.
It is a similar story for HP, which bulked up its services via the purchase of EDS. For the nine months ending on 31 July, HP's services revenue was $25.7bn. Of that sum, infrastructure technology outsourcing and technology services represents the bulk of the revenue pie.
Dell's challenge is to scale Perot's services unit so it can play catch-up to the big services guns.