Monday, 21 September 2009

Dell, Perot try the Texas Tango

(By Anthony Miller – Monday 21st September 2009 12:45pm). Too late for our email run this morning (Monday), we’ve just heard that Dell is to buy Perot Systems for $3.9b cash, a near-70% premium to Perot's closing price on Friday. This is landscape-changing stuff – for both parties. The news release claims that “Dell and Perot Systems share several key characteristics and our products, services and structures are overwhelmingly complementary”, which is not the way I would describe the situation, especially regarding products and services!

OK, so Dell wants to ‘do an HP’ and get into ‘grown up’ services. This itself is a dodgy decision - way beyond its 'knitting'. Putting this 'small' point aside, HP was part of the way there in terms of ‘enterprise services’, though had nowhere near the scope and scale of EDS. But Dell is surely even further distant than HP, and Perot is hardly the standard-bearer in the field. I just can’t see at the moment where this is any sort of natural fit.

On the financial side, Dell is paying 1.4x Perot’s 2008 revenues and 21x 2008 operating profit which just sounds so over the top. When HP acquired EDS in May ’08 for some $14b, this represented a 33% premium to EDS’ closing price and about 0.6x EDS’ prior year’s revenues. Admittedly, EDS was far less profitable than Perot, recording a 1.8% operating margin in Q1 08 (its last report prior to the announcement) vs Perot’s 7.6% for Q2 09 (Dell reported a 5.3% margin in its latest quarter). But EDS was also 10 times larger than Perot, with (2007) revenues at $22b vs $2.8b for Perot in 2008.

So, first reaction; strike one on the strategy and strike two on the financials. By the way, Perot’s UK revenues were $123m (then £66m) last year, so this announcement is unlikely to be a game-changer on our fair shores. We’ll have lots more to say about this in future posts.

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