Dell's $3.9 Billion Perot Gamble

Sept. 25, 2009 InformationWeekanalytics.com Analytics Alerts Dell’s $3.9 Billion Perot Gamble Contents Dell faces numerous obstacles, including integration 2 Dell’s Perot Bid A $3.9 Billion challenges and wary customers, as it looks Gamble to become a player in the tech services market. 5 Dell’s Acquisition Of Perot Helps Healthcare Push But it’s on the right track. 6 Dell Buys Perot: Told You So! 7 Dell-Perot Cash-Outs And The Media’s ‘Windfall’ Idiocy Dell’s Perot Gamble InformationWeekanalytics.com Analytics Alerts Sept. 22, 2009 Dell’s Perot Bid A $3.9 Billion Gamble By Paul McDougall DELL’S $3.9 BILLION DEAL TO ACQUIRE PEROT SYSTEMS could be a boon to its own sagging fortunes and to business customers looking to implement new architectures like virtualization and cloud computing. But the PC and server maker will have to manage thorny integration issues as it absorbs a company known for its rigid, by-the-book culture and reliance on a market-healthcare-where Dell has little experience. On top of these issues, Dell is a relative neophyte when it comes to IT services and M&As. Not that there isn’t a plan. Dell wants to marry its hardware and automation software with Perot’s integration and outsourcing services so it can offer end-to-end “solutions,” mirror- ing earlier moves by rivals Hewlett-Packard and IBM. The parts are all there-in theory at least. Dell has the iron and applica- tions needed for advanced data centers. It bundles VMware’s View virtual desktop offering Does Perot give Dell with its Latitude and Optiplex [a winning hand? PCs and PowerEdge servers to create an off-the-shelf virtualization package. Dell also has tweaked a line of servers to reduce heat emissions and optimize performance on Microsoft’s cloud-based Azure operating system. For its part, Perot brings integration, deployment, and systems management expertise. It recently launched a cloud integration service, advising customers on cloud offerings and how to combine cloud-based products from different vendors, as well as vetting those products for security vulnerabilities. Perot can host and manage it all from one of its massive data centers. 2 Sept. 25, 2009 Dell’s Perot Gamble InformationWeekanalytics.com Analytics Alerts Michael Dell says it’s a winning hand, combining “two iconic IT brands who share a common vision of reducing IT complexity and total cost of ownership.” It sounds good, but Steve Martin, a partner at Pace Harmon consultants, wonders if Dell has the management chops to make it happen. “Perot is very methodical and somewhat stiff and regimented,” Martin says. “That’s not the culture that Dell has had. ... The integration issues are not going to be trivial.” In its favor, Dell deepened its bench strength earlier this year, hiring IBM’s top M&A guru, David Johnson, whose experience could be crucial to Dell’s ability to add Perot’s operations without alienating customers or employees. Dell has made six acquisitions in the past two years, with its only major one being the $1.4 billion takeover of storage specialist EqualLogic. At IBM, Johnson oversaw 14 significant acquisitions last year alone. One possible hitch: Johnson’s participation isn’t assured. IBM sued the exec earlier this year for breach of contract, asking a judge to force Johnson to honor a noncompete clause. TIME TO DIVERSIFY Integration risks aside, many observers say Dell has little choice but to diversify. The recession, commoditization, and competition from a renewed HP have taken a toll on the company. Dell’s PC sales slumped 33% in the most recent quarter, while sales of servers and storage products were off 22% and 19%, respectively. The company’s reliance on hardware-related products for 90% of its revenue has saddled it with an anemic operating margin in the 5% range. In acquiring Perot, Dell is following in the footsteps of IBM and HP—computer industry giants that in recent years have sought to build out higher margin IT services and outsourcing busi- nesses to compensate for diminishing margins in the increasingly commoditized hardware market. Pairing services with hardware can also appeal to customers who prefer to deal with fewer vendors. IBM’s Global Services unit has accounted for about half the company’s revenue in recent years. HP, meanwhile, dramatically stepped up its presence in the outsourcing market with the $13.9 billion buyout of Electronic Data Systems last year. EDS, like Perot Systems, was founded by billionaire H. Ross Perot and is part of the Dallas area’s tech services corridor. The Perot deal is “a good first step” in Dell’s campaign to cut dependence on boxes, says JPMorgan analyst Mark Moskowitz. Perot has weathered the recession fairly well, but if Dell is to seriously challenge IBM and HP-EDS in outsourcing, it will have to take a company founded 3 Sept. 25, 2009 © 2009 InformationWeek, Reproduction Prohibited Dell’s Perot Gamble InformationWeekanalytics.com Analytics Alerts in 1988 by billionaire and gadfly politician H. Ross Perot well beyond its healthcare base. Perot Systems derives half its revenue from healthcare, 25% each from the commercial and government sectors. “We believe Dell will need to expand the services capabilities of Perot Systems to other verticals to establish a major enterprise services platform,” said Moskowitz, in a research note. Dell says it plans to do just that, calling its agreement to acquire Perot an “anchor” for other moves. The deal will bring Perot Systems capabilities to a much “wider set of customers” says Michael Dell, who envisions parlaying his company’s strength in numerous commercial segments into new accounts for Perot, which is on pace for $2.5 billion in sales in the current fiscal year. Meantime, customers of both companies will need to keep a close eye on the merger’s progress. For hardware buyers, there’s the potential to fall victim to up-selling as Dell will no doubt aggressively push service offerings onto its existing client base after the deal’s complete. And Perot customers need to guard against tempting bundling deals that look good up front but can hide the true cost of the individual pieces. “When there’s a bundled procurement, the vendors have an amazing ability to show you what they want to show you and hold back what they don’t want you to see,” says Pace Harmon’s Martin. “If the equipment provider and service provider are the same and that’s the best deal, then you contract together. But otherwise you want to look separately,” Martin says. Martin suggests Perot customers-or prospective customers-obtain certain guarantees before committing to new contracts while the outsourcer is in transition. Among other things, Martin advises getting written assurance that a particularly effective account rep or service delivery manager isn’t shunted off to “a hot Dell account.” Dell hopes to close the deal later this year or in early 2010. To get it done, it will buy up Perot’s outstanding Class A shares for $30 per share-a significant premium over Friday’s $17.91 clos- ing price. Current Perot Systems CEO Peter Altabef is expected to continue leading the opera- tion. Plans also call for Perot chairman Ross Perot Jr. to join Dell’s board. Dell said it believes the acquisition will contribute positively to earnings by 2012. 4 Sept. 25, 2009 © 2009 InformationWeek, Reproduction Prohibited Dell’s Perot Gamble InformationWeekanalytics.com Analytics Alerts Sept. 21, 2009 Dell’s Acquisition Of Perot Helps Healthcare Push By Marianne Kolbasuk McGee DELL’S $3.9 BILLION ACQUISITION of Perot Systems will help fortify Dell’s pursuit of new customers in the healthcare industry, a sector that’s been getting a lot of attention from Dell— and its competitors—in recent months. The federal government’s $20 billion HITECH stimulus program is creating significant demand for health IT products and services—such as the purchase and deployment of e-medical record systems. Vendors don’t want to be left out of that action, and Dell is no exception. The acquisition of Perot bolsters Dell’s professional services and IT consulting offering in general, positioning Dell to better compete against IBM and HP-EDS in general. But in the healthcare sector in particular, this acquisition comes at a strategic time for Dell and Perot. “The economic stimulus will drive adoption of health IT; demand will be considerable,” said Eric Brown, a Forrester Research analyst who follows the healthcare IT arena closely. The Perot acquisition helps better position Dell to take advantage of this, he said. Perot has experience in large hospital deployments, particularly in administrative systems and claims processing, and some clinical use as well, he said. Earlier this month, Dell unveiled Dell Affiliated Physician EMR, a modular offering of services and products for cloud-based, hospital-sponsored e-medical record deployments in doctors’ offices. As part of that, Perot was offering its hosted services to support those installations of third-party EMR software running on Dell computers. That last announcement seemed like a natural evolution to an alliance that Dell and Perot unveiled last April to sell integrated systems, including virtualized desktops, storage, and server implementation to hospitals and physician practices. “If you don’t have a professional services organization, you’re out of the game,” said Brown. Customers in healthcare—and other industries, for that matter—“are looking for outcomes,” he said. And for hospitals and doctors’ offices, those outcomes include implementing and using health IT to meet the U.S. government’s “meaningful use” requirements for getting stimulus rewards starting in 2011.

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