Dell Seeks To Serve With $3.9 Bil Deal For Perot Systems

• Patrick Seitz
• On 6:52 pm EDT, Monday September 21, 2009

Playing catch-up with rivals Hewlett-Packard and IBM, Dell on Monday announced a deal to acquire information technology services firm Perot Systems for $3.9 billion.

Dell's (NasdaqGS:DELL - News) purchase, the biggest in its history, is aimed at transforming the company from a computer manufacturer into a full-service, high-tech hardware and solutions company.

The acquisition of Perot Systems (NYSE:PER - News) should help it better compete for enterprise customers against industry leaders HP (NYSE:HPQ - News) and IBM (NYSE:IBM - News).

HP greatly expanded its services capabilities in August 2008 when it purchased Electronic Data Systems for nearly $14 billion. EDS, like Perot Systems, was founded by maverick businessman and one-time presidential candidate H. Ross Perot Sr.

"Dell is suffering a little HP envy," said Jim Kelleher, an analyst with Argus Research. But, he added, Dell is paying "an awfully big premium" to acquire Perot Systems.

Dell agreed to pay $30 a share for the company, 68% over Perot's closing price on Friday.

News of the merger sent Dell shares down 4% to 16.01, while Perot closed up 65% at 29.56.

Since Dell founder Michael Dell returned as chief executive in January 2007, Dell has struck deals to buy eight companies, including data storage, consulting and software firms. Before then, Dell was averse to acquisitions, buying just five companies over 22 years. Dell's previous biggest deal was its $1.4 billion takeover of storage company EqualLogic in January 2008.

Dell's purchase of Perot Systems also is taking place in a reinvigorated market for mergers and acquisitions. Last week, Adobe Systems (NasdaqGS:ADBE - News) announced its intent to buy Omniture (NasdaqGS:OMTR - News) for $1.8 billion. On Aug. 31, Walt Disney (NYSE:DIS - News) said it planned to buy Marvel Entertainment (NYSE:MVL - News) for $4 billion.

Dell says he continues to look at acquisitions to shore up the company's tech offerings.

Over the past four quarters, Dell and Perot Systems had a combined $16 billion in enterprise-hardware and IT-services revenue, with about $8 billion from enhanced services and support.

Perot specializes in providing information technology systems and services to the health care industry and government markets. Health care IT, in particular, is viewed as a major growth market as hospitals, clinics and physicians offices move to improve their operations with new computing and data systems.

Dell was "bold" to pay up and buy an asset that puts them into those critical markets, says Jarrad Zalkin, vice president of investment banking for TM Capital.

Dell is likely to acquire some consulting businesses to augment its offerings to those vertical markets, Zalkin says.

Companies like Perficient (NasdaqGS:PRFT - News), Tectura and Ciber (NYSE:CBR - News) could be good targets for Dell, Zalkin says.

The deal will give Dell the opportunity to sell its hardware to Perot's customer base. Dell will be able to extend Perot's reach into more markets, Michael Dell said in a conference call.

"This is about growth," Dell said. "We have a pretty broad portfolio of capabilities at Dell. This will extend and expand that into new spaces as we are able to serve more customers and more places around the world with more capabilities."

Dell's purchase of a major services company does not mean Dell doesn't see growth in its core hardware business, he says.

The combination of Dell and Perot will create a "formidable" competitor in the tech services business, Dell says. The two companies are "overwhelmingly complementary," Dell said.

"It's a direct shot across the bow of HP-EDS and puts them in a better position to compete more effectively with IBM," TM Capital's Zalkin said.

Dell will have to cut costs quickly in the merged organization to justify the hefty premium it's paying for Perot, he says.

Perot Systems Chairman Ross Perot Jr., son of the company's founder, said the combined firm will help it gain more health care IT business.

"Dell brings a lot of strength with a lot of scale," he said. "It brings a tremendous balance sheet, if there are certain tuck-in acquisitions we need to make around health care."

Once the acquisition is complete, Perot Systems will become a unit led by current CEO Peter Altabef. Meanwhile, Dell directors are expected to consider Ross Perot Jr. for appointment to the Dell board.

Dell expects to close the deal in its November-January fiscal quarter, pending regulatory approvals. Dell expects the deal to be accretive to earnings in its fiscal 2012, which will begin around Feb. 1, 2011.

Buzz up!