The arms
race in the profitable IT services sector is hotting up.
On Monday,
Dell Inc. announced that is has agreed to acquire Perot Systems in an
all-cash deal valued at roughly $4 billion. Dell will not have to finance the
purchase: the Round Rock, Texas computer maker is currently sitting on about
$12 billion in cash.
Dell is
paying a stiff premium to acquire Perot. The company plans to offer $30 dollar
a share to Perot stockholders. That’s a huge windfall for those investors,
considering the 200-week moving average for Perot stock is just under $15.
But Dell founder and CEO Michael Dell defended the
deal, saying he sees Perot Systems as “the foundation asset for [Dell’s] IT
services.” Indeed, Brian Gladden, Dell CFO, went as far as to dub Perot “an
anchor acquisition.”
Only time will tell if Perot indeed turns out to be
an anchor for Dell -- or a millstone. Technology mergers are notoriously tough
to pull off, and they often fail to generate forecast cost-savings or
synergies.
Nevertheless, Dell’s purchase of Perot has seemed
like a destined deal ever since rival Hewlett-Packard acquired IT services
leader EDS in May 2008. That purchase cost HP $14 billion, but substantially
ratcheted up the PC maker’s IT services business. IT services, which include
things like systems support and back-office functions, tend to generate higher
margins than computer sales.
Case in point: Dell’s current operating margin is
around 5.3 percent; Perot’s is closer to 7.6 percent. HP’s operating margin is
near 8 percent.
Once the acquisition is
complete, Perot Systems will become Dell’s services unit. The division will be
led by Peter Altabef, the current Perot Systems CEO.
Both Perot Systems and EDS were founded by former
presidential candidate Ross Perot. His son, Perot chairman Ross Perot, Jr. will
likely get a seat on the Dell board.
Dell expects the transaction to be accretive to the
company’s GAAP earnings in its fiscal year 2012. While that’s a ways off, the
acquisition gives Dell a huge leg up in the hunt for IT services contracts.
Perot currently has about $8 billion in signed deals in its pipeline.
Most of those contracts are with health-care
companies and government agencies. In fact, about three-quarters of Perot’s
sales come from those two sectors, which are seen as recession proof. Thus, the
Perot acquisition could help Dell smooth its revenue flow. PC sales tend to be
cyclical and usually plummet during economic downturns.
Gladden said the two companies have about $4 billion
in shared annual spending. The Dell finance chief believes the merger will
eventually generate about $300 million in cost savings.
But those savings may be tough to come by. Perot is
already a lean operation. About a third of its employees work in India, and the
company’s annual spend on SGA is only $300 million or so.
Instead, the Perot acquisition is purely aimed at
boosting Dell’s top line growth. “The revenue growth potential is significant,”
said Gladden. “It’s better than other targets we looked at.”
Expect Dell to purchase some of those other targets
as well. This is just the company’s opening salvo in the race for IT services
dollars -- a race that began in earnest in May 2008.
in CFO Conversations by 
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