Dell pays high price for Perot

 

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By Reuters

Posted on 22 Sep 2009 at 07:41

Dell plans to buy Perot Systems for about $3.9 billion, paying a steep 67.5% premium to expand its technology services business and compete with HP and IBM.

Perot Systems, a computer services provider founded in 1988 by former US presidential candidate Ross Perot, would be the largest ever acquisition by Dell and comes after extended speculation about its mergers and acquisition strategy.

The purchase price seems relatively rich

Dell, which lags far behind HP and IBM in the services arena, is looking to buy a company with a strong focus on serving healthcare and federal government customers. It expects the acquisition to add to earnings in fiscal 2012, but some analysts thought the price tag may have been too high.

Dell says it will pay $30 per share for Perot Systems, whose Friday closing price was only $17.91.

J.P. Morgan analyst Mark Moskowitz said the price is 1.4 times Perot Systems' sales, compared with HP's purchase of EDS for 0.6 times sales last year. That would make the acquisition a little expensive, although it was good for Dell to lessen its dependence on personal computers, Moskowitz claims. "We do see the building block as being compelling, but the purchase price seems relatively rich," he writes in a research note.

High-margin services

The deal comes as large technology companies expand into higher margin IT services to secure stable and recurring revenue as computer hardware becomes cheaper.

Dell is the world's second biggest PC maker, with roughly 60% of its revenue coming from that market. The company has been trying to diversify its range of offerings, and services currently make up only around one-tenth of sales.

Kaufman Bros analyst Shaw Wu says Dell is finally taking a step to address some of its weaknesses, but it remains to be seen how much impact the deal will have as Dell's combined services offering would still be much smaller than its rivals.

"This still doesn't have quite the scale to compete... but it's also not so outrageous it will be difficult to integrate," Wu says.

The announcement marked the second time in as many years that Ross Perot-founded companies found themselves at the centre of a major technology deal. Last year, HP made its bold play in the services segment with the $13.2 billion purchase of EDS, which was founded by Perot in 1962. HP is now the world's biggest PC maker and number two IT services player, behind IBM.

Perot Systems specialises in providing business processes and technology consulting services, with more than a third of its 23,000 employees based in India. It estimates that it is the largest provider of IT services to hospitals, operating in roughly 1,000 around the world. Half its sales are from the healthcare sector, and a quarter in government services.

Forrester analyst Paul Roehrig says Dell's services offering has traditionally been tied to hardware support, but the company has been trying to shift into more managed services, which the Perot deal should help facilitate. "It's a pretty solid deal. Dell needed more firepower in the services space... it gets some great customers in some attractive verticals," he says.