Hot Stocks: Dell Aims to Double Sales of Service Businesses in Three Years

After losing a bidding war for a highly-sought-after acquisition target, many companies would pull in their horns and take time to regroup before venturing back into the murky mergers and acquisitions (M&A) pool.

But personal-computer icon Dell Inc. (Nasdaq: DELL), which lost out in a highly-publicized bidding war for 3Par Inc. (NYSE: PAR), is forging ahead with an aggressive multi-billion dollar acquisition plan.

Computer companies are increasingly relying on acquisitions to broaden their product offerings and make inroads on competitors' market share.

But as tech powerhouses busily snatch up quality companies, the prices for the smaller firms have skyrocketed.

Hewlett-Packard Co. (NYSER: HPQ) outbid Dell for 3Par, a maker of storage technology devices, by agreeing to pay $2.35 billion for the company. That was more than three times Dell's original bid for the business.

But instead of licking its wounds, Dell plans to employ takeovers as part of its plan to double the sales of its data-center business -- large banks of servers and storage systems that deliver software and information over the Internet.

The company has set a goal for its computer servers, data storage, networking gear and technology services to generate $30 billion in sales by the end of fiscal 2014, up from $17 billion in the year that ends in January, a company executive told The Economic Times.

But after losing the expensive battle for 3Par, Dell plans to exercise restraint as it allocates part of the $12.4 billion in cash and cash equivalents on its balance sheet to future acquisitions.

In order to avoid bidding wars in future deals, the company will take its time, so that it doesn't increase prices so much, chief financial officer Brian Gladden told Bloomberg News in an interview last week.

"We're going to be patient," Gladden said. "You don't want to have a situation in which boards think a 3Par valuation is the starting point. You have to be disciplined, and that's what we're doing right now."

Dell is trying to reduce its dependence on sales of desktop and notebook computers, which account for more than 55% of its revenue, as industry wide profit margins continue to shrink.

Data storage offers more profitable business opportunities for tech companies specializing in other areas. Dell, the world's largest PC maker, expects corporate tech spending to boost revenue as much as 19% this year.

Dell last week agreed to buy software company Boomi, which lets companies share data between Web applications and programs that run in their data centers, for an undisclosed amount.

Corporate-computing companies such as Isilon Systems Inc.(Nasdaq: ISLN), Fortinet Inc. (Nasdaq: FTNT) and Riverbed Technology Inc. (Nasdaq: RVBD) may become "less risky" acquisition targets if their profit margins improve, Gladden said.

Dell is also carving out a place for itself in the cloud computing market by pitching a variety of infrastructure products that the company says will work with any standard server, including any of Dell's competitors.

Cloud computing allows users to access data, software and services over the Internet and corporate networks, reducing the cost of purchasing storage capacity and allowing companies a cheaper way to revamp their information technology (IT) systems.

Businesses are earmarking more IT funds than ever before to invest in cloud computing. Cloud services revenue will reach $68.3 billion this year, a 16.6% jump from last year's $58.6 billion, and will hit $148.8 billion by 2014.

"IT managers are thinking strategically about cloud service deployments; more-progressive enterprises are thinking through what their IT operations will look like in a world of increasing cloud service leverage. This was highly unusual a year ago." said Ben Pring, research vice president at Gartner Inc. (NYSE: IT).

The computer maker bought Boomi, which counts among its clients, to shore up its ability to provide software over computer networks and help integrate cloud-based applications between programs.

That could spell trouble for startups and smaller vendors jockeying for position in the information technology market because Dell now dwarfs all competitors in the cloud infrastructure sector.

Besides expanding its data-center and cloud computing businesses, Dell is taking steps to broaden its customer-base in mobile applications.

Dell is distributing its new Venue Pro smartphones, running Microsoft Corp.'s (Nasdaq: MSFT) Windows Phone 7 software, to 25,000 employees, or about a quarter of its workforce, replacing Research In Motion Ltd.'s (Nasdaq: RIMM) BlackBerry devices and other mobile phones, Gladden told Bloomberg.

Dell is also trying to convince business customers to switch from BlackBerry handsets to Dell phones as a cheaper way to connect mobile workers to corporate networks.

To gain ground with consumers, Dell is broadening the market for its Alienware line of computers designed for game players. The company increased in-store advertising for the brand at Best Buy Co. (NYSE: BBY), and is developing a tablet for gamers that would have a 5-inch or 7-inch screen with Alienware's brand.

The company is also entertaining the idea of a management-led buyout. Chief Executive Officer Michael Dell told a group of investors and analysts in New York in June that he would consider taking the company private. Dell has a market value of $28.1 billion, Bloomberg reported.

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