Dell Inc.'s (Nasdaq: DELL) agreement to buy information technology service provider Perot Systems Corp. (NYSE: PER) yesterday (Monday) signals a sign of the times as computer makers branch out from their core businesses into the lucrative services sector.
The acquisition, which is valued at $3.9 billion, or $30 per share, represents a 68% premium to Perot's Friday closing price of $17.91. That's a significant markup when compared to the 33% premium that Hewlett-Packard Co. (NYSE: HPQ) paid for Electronic Data Systems LLC (EDS) last year in a $13.9 billion deal.
"This was a move designed to try and catch up with its competitors," Kaufman Brothers LP analyst Shaw Wu told Bloomberg News. "[Dell was] behind in services and being vertically integrated. That's the model that worked – providing the hardware, software and services."
Indeed, Dell competitor H-P is already reaping the benefits of its buyout of EDS. Services. EDS revenue accounted for $8.47 billion of H-P's sales in the three months ended July 31, almost 31% of its overall take and its largest segment in the quarter. Services revenue for Dell represented just 10% of its overall sales in its last quarter.
Both Dell and Perot service many of the same customers, including government agencies, small-to-medium businesses and healthcare providers. Together, the new services business would have annual sales close to that of H-P's at roughly $8 billion.
Perot expects to benefit from the U.S. government's plan to convert medical files from paper to electronic records and could be shared across all providers. The plan currently accounts for $20 billion of the $787 billion stimulus package, but U.S. President Barack Obama said that investment would eventually be $50 billion.
The move comes as Dell's PC sales continue to falter: Desktop computer sales in its last quarter fell 34%, while laptop computer sales dropped 20%.
"Signals about the demand environment are mixed, but we're preparing for what we believe will be a powerful replacement cycle, with virtualization and managed services playing larger roles in what customers want and Dell provides," Chairman and Chief Executive Officer Michael Dell said after the company's first quarter earnings report.
Despite the slack in PC sales, CEO Dell is optimistic about the future as computers of consumers and businesses are aging. He sees Microsoft Corp.'s (Nasdaq: MSFT) October 22 release of Windows 7, as well as faster processors from Intel Corp. (Nasdaq: INTC), as the ignition for PC and server purchases next year.
"The size of the installed based of old hardware has never been greater," Dell said in a conference call with analysts. "I'm here to tell you there's going to be a refresh cycle next year. It's not going to come in the first month or the second month, but over the course of the year."
Former presidential candidate H. Ross Perot Sr founded Perot in 1988. Before that, he founded EDS in 1962. His son, H. Ross Jr., is currently chairman of Perot and will likely be appointed to the Dell board of directors.
News and Related Story Links:
- Bloomberg News:
Dell to Buy Perot for $3.9 Billion to Gain Services
- San Francisco Chronicle:
Stimulus Would Boost Digitizing Health Records
- Money Morning:
Semiconductor and Electronics Makers Anticipate a Bounce in Business Spending Next Year
- Seeking Alpha:
Dell Inc. F2Q 2010 Earnings Call Transcript