Dell's $3.9 Billion Perot Gamble

Sept. 25, 2009

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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

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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

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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 businesses 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

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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.

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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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Besides IBM, HP-EDS, and the like, Dell-Perot also faces tough competition for healthcare IT- related dollars from players like CSC, “which is very strong in this area,” said Brown—and also from healthcare-specific products and services companies, including Cerner and McKesson.

With all of this in mind, Dell and Perot are “raising the game of their offering,” he said.

Sept. 21, 2009 Dell Buys Perot: Told You So! By Bob Evans

THREE MONTHS AGO, Global CIO asked, “Dell Needs To Make An B A L C O I L O Acquisition—But Which One?” We listed 15 prospects from financial analysts, G and from those we picked Perot Systems as the best fit for Dell. This morning, Dell bid $3.9 billion for Perot, and we hope all you sharpies who followed our advice will enjoy the 68% premium Dell’s paying for your Perot shares.

From my colleague Paul McDougall’s news story this morning:

“In a an effort to better compete with more diversified rivals like Hewlett-Packard and IBM, Dell on Monday jumped into the tech services market with the announcement of a deal to acquire Texas-based Perot Systems for $3.9 billion. ... 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 businesses 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.”

The addition of Perot “significantly expands Dell’s enterprise-solutions capabilities and makes Perot Systems’ strengths available to even more customers around the world,” said CEO and founder Michael Dell in a statement announcing the deal.

In our prescient July 1 post, we opened by saying, “In a rapidly changing IT market, Dell has stood pat for a while as competitors have jumped into virtualization, the cloud, software, net- working, and services. A few financial analysts feel Dell needs to quickly regain the confident aggressiveness that made it a global powerhouse earlier in this decade, and here are some acquisition targets they think will enable Dell to make that leap.”

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After listing those 15 prospective targets—which included Perot but also companies ranging from Salesforce.com to McAfee to Palm—here was our analysis on what Dell should do:

“Meanwhile, Dell’s got only limited presence in the emergent areas mentioned at the top of this piece, such as virtualization, cloud computing, and services. It’s in those areas where Dell can make an impact by showing customers and competitors alike that it’s going to remain a significant force to be reckoned with in the broad enterprise space for the foreseeable future. The alternative is to glide slowly down a path from strategic partner to tactical commodity vendor, and that way irrelevancy lies.

“If I had to bet, I’d say Perot Systems and Dell will be having some very interesting conversa- tions this summer—they could form a very strong combination and give each other vital new capabilities in the demanding enterprise-IT market that’s taking shape around us.”

So while we’re far too humble around here to say “I told you so”—well, that’s if you’re willing to overlook our headline, plus the inference in our opening sentence, plus this sentence—we’d just like to say that this is an example of the unique value we try to offer you here at InformationWeek’s Global CIO: Other media properties specialize on telling you what’s already happened, but we focus on helping you understand what’s going to happen.

Sept. 22, 2009 Dell-Perot Cash-Outs And The Media’s ‘Windfall’ Idiocy By Bob Evans

B A L C AFTER DELL OFFERED EARLY YESTERDAY to acquire Perot Systems, a O I L O G supposedly sophisticated financial news service pumped out this headline: “Perot Windfall From Dell Deal May Reach $400 Million.”

Windfall?

Twenty-one years ago, Ross Perot launched a startup company bearing his own name, funded with his own money, and inspired by his own ideas and leadership. He hopped aboard that callow startup and charged it straight into the teeth of huge, sophisticated, and deeply entrenched competitors such as EDS (which he also started, back in 1962), IBM, and others. He asked no quarter and, to be sure, he gave none. He believed his new company could connect with customers and prosper via hard work, fresh ideas, and a commitment to excellence.

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Yesterday, Perot Systems agreed to be acquired by Dell for $3.9 billion to help Dell expand beyond hardware and into the higher-value services market wherein Perot Systems had built itself into a $2.6 billion player. At the price of $30 per share offered by Dell, the Perot family’s direct and indirect holdings will be worth $952 million.

Ross Perot’s serial entrepreneurship and his creation of two large and powerful companies in a wickedly competitive business are expressions of some of the best free-market qualities this country possesses: entrepreneurship, bold risk-taking, and a passionate commitment to excellence and innovation. That spirit has helped make the United States the strongest and most- generous nation on Earth, and although we’re in the midst of temporary downturn, that same entrepreneurial spirit should be celebrated as a core element in helping create the global econo- my that has raised the standard of living for hundreds of millions of people across the globe.

Windfall?

I have no idea if Ross Perot thought of any of those outcomes when he started Perot Systems. But it’s beyond question that he thought a very great deal about creating jobs—lots and lots of jobs—and prosperity—lots and lots of prosperity—for the people who would agree to join him on that adventure, and who agreed to throw themselves into their work at Perot Systems and defy the odds of having a startup company not just survive in the midst of giants like EDS and IBM and ACS and HCL, but to prosper quite nicely.

In doing so, Ross Perot and his team created tens of thousands of jobs—and if at one time not so many years ago we all thought of a job as something of a commodity, today’s global recession has no doubt reshaped our perceptions of just how precious and valuable solid employ- ment truly is. He created wealth for many thousands of associates—and for himself, no question about it—based on the risk he’d taken back in 1988 and the capital he risked and the commitment he made to create something out of nothing.

And that’s why, in spite of the media’s regular ability to undercut our already humble expecta- tions, I got quite a jolt out of this headline from Bloomberg.com: “Perot Windfall From Dell Deal May Reach $400 Million.” What in the wide wide world of common sense was that writer possibly thinking?

Webster’s New 20th Century Dictionary defines “windfall” this way: “An unexpected legacy or any unexpected piece of good fortune.” The clear implication from Bloomberg is that Ross Perot and his family didn’t go out and earn that $400 million, that they should somehow be less than fully entitled to it, that it was not honestly and industriously earned.Seems like a rather naked attempt by Bloomberg to stir up some class envy, a loathsome if not-uncommon tactic these

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days. The approach continued in the article itself, as the writer’s opening sentence said the deal “stands to make the Perot family almost $400 million richer.” Richer? Why not keep the qualita- tive angle out of it and say “stands to make the Perot family almost $400 million”?

In the third sentence as well, the writer again uses the tactic of saying something that is techni- cally accurate but contextually misleading: “The two blocks of stock together are valued at $952 million at the $30-a-share acquisition price, which is 68 percent more than the family’s $568 million stake on Sept. 18, before the deal was announced.”

Yes, that’s true—but as written, the sentence singles out the Perot family as if it received some special-treatment escalator clause that entitled it to 68% appreciation in 72 hours while every- one else made only pennies or perhaps even took a loss. Why not just say that the value of every single Perot share held by every single Perot stockholder block went up 68% because that’s the premium Dell offered?

But the real sign of class envy is the use in the headline of “windfall.” And there are two and only two alternatives for why Bloomberg used that specific and loaded word, and neither one reflects very well on that news service. Here are the choices: a) It used “windfall” intentionally, knowing full well the precise definition given above. Under this scenario, then, it’s saying that the founder of and primary investor in and animating spirit behind a business is not fully entitled to or worthy of the value that company has created.

b) It used “windfall” without knowing what it means, which is not exactly a strong fallback position for an outfit whose specialty is supposed to be knowing what words mean and being able to string them together effectively.

This is as sorry a piece of so-called business journalism that I’ve seen since another hack job three months ago in BusinessWeek when that formerly responsible magazine asked, “Do you think limits should be set for CIO pay?”

Let’s have a vote on which is worse: Bloomberg’s depiction of the Perot family’s “windfall” or BusinessWeek’s plea for government-controlled CIO pay? Let me know what you think.