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BW Businessworld

A Wise Move, Or A Bold One?

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With the personal computer (PC) market faltering in recent times due to the global economic recession, and revenues from the hardware space heading southwards, computer maker Dell has managed to convert a two-year long on-off discussion with Perot Systems into a deal priced at $3.9 billion. Dell is paying a 68 per cent premium over Perot's stock value. But Dell CEO, Michael Dell, says it is a winning combination. "This makes great sense because of the obvious ways our businesses complement each other and enables us to grow profitably over time."

What explains this sudden move? Says Pascal Matzke, vice-president at Forrester Research, "Since its computing equipment business was hit by the economic downturn, Dell has been exploring alternative growth areas." While it has been slowly building up its own services capabilities over the past two years, up to this point Dell's services division lagged the size and scalability to tackle the existing market opportunities. So the acquisition of a sizable and reputable services player was definitely in order, says Matzke. As Kumar R. Parakala, global head of sourcing at KPMG, puts it, "Dell had two options, either to invest in consumer products or get into enterprise offering. Services are where the money is, and thus Dell has chosen wisely."

Perot's services portfolio offers a nice mix of services that reach well beyond Dell's existing IT support services. Service margins are healthy and Perot's footprint in the public sector and healthcare arena offers a growth momentum in times where other verticals are suffering. Says KPMG's Parakala, "The acquisition provides Dell with Perot's expertise based on which they can together target new areas such as virtualisation of data centres and private cloud networks." That apart, this also gives Dell a larger footprint in western Europe, China and India. 

Analysts see this as a bold move by Dell, and with Perot's services business, Dell is on track to better compete with the likes of Accenture, CSC, HP-EDS and IBM. Size-wise, Dell's services organisation still pales in comparison with competitors. According to Nishant Verma, vice-president at Tholons Capital, "This is clearly targeted to compete with HP/EDS and IBM. But Dell-Perot is still definitely a smaller player than any of these." HP, having purchased EDS, does $40 billion in services revenue, while IBM is even bigger with $57 billion in services revenue. Dell's revenues from services are about $5.1 billion and with Perot's $2.8 billion, the combined services company will be $7.9 billion. So, taking on large players such as IBM and HP will require further acquisitions, which are already being planned by Dell.

That said, the fact is for any mergers and acquisitions (M&A) deal, a speedy post-merger integration plan is critical. However, integrating Perot, which has 23,000 employees, won't be easy for Dell. Says Tholons's Verma, "While this may look like a headcount-heavy deal given the state of the markets, if we look at the bigger picture, it was imperative for Dell to enter the services market, and any acquisition smaller than this would not have made an impact on their current positioning of a hardware / infrastructure player." Explains KPMG's Parakala, "HR integration between Dell and Perot could be challenging and a headcount cut may be likely."

Says Forrester's Matzke, "Finding the right balance between service standardisation and customisation is going to be a big issue." Also, Dell's acquisition track record on integration issues is not very impressive. The bottom line: while there is a lot to gain from Perot's existing positioning, the challenge will be to create a truly consistent and integrated image of the new Dell. The question, then, is whether this is simply about following in the shoes of IBM and HP and competing with them or whether Dell has something really new to offer.

(This story was published in Businessworld Issue Dated 05-10-2009)