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Dell: Perot purchase an 'anchor' acquisition

The $3.9 billion acquisition of Perot Systems is a down payment on Dell's big plans to evolve its business beyond PCs and servers.

This was originally posted at ZDNet's Between the Lines.

Dell's $3.9 billion acquisition of Perot Systems gives the company a better foothold in the IT services market, but it's really just the beginning. It's a down payment on the company's big plans to transform its business.

As noted earlier (statement, Techmeme), Dell is paying $30 per share for Perot Systems, which is heavily focused in the only two industries growing these days--health care and government. Perot and Dell had been long-time partners.

Dell had been talking about diversifying away from its core PC and server businesses for months, but the Perot purchase is the first move that illustrates the company is serious about its transformation.

CEO Michael Dell said on a conference call the Perot purchase is a platform that the company can use to acquire more companies. Dell specifically said it will look for more deals similar to its EqualLogic purchase. Dell also said that Dell and Perot would be able to grow faster combined. "We will leverage Perot's services capability across Dell's customer base," said Dell. "This acquisition makes great sense."

Indeed, Dell is certainly focused on making sure the Perot integration goes smoothly. Perot CEO Peter Altabef will head a services unit comprised of joint Perot-Dell services units.

And the two companies--both based in Texas, about 200 miles apart--hope proximity can make any integration smooth (even though about a third of Perot's employees are in India). Perot and Dell have partnerships for financing and targeting verticals like health care (48 percent of Perot's annual revenue) and government (25 percent of sales). Combining the companies was the best move to further the relationship, said Dell.

Officials said that Perot is one of the largest IT services providers to hospitals and physicians. President Obama has made health care IT a big focus to slow the rate of increasing costs.

However, there is an increased degree of difficulty for Dell. Perot has 23,000 employees. Altabef said he was "personally committed" to the deal and Michael Dell said that there is a good cultural fit between the two companies. That cultural fit--not to mention retention packages--will keep Perot talent on board, executives said.

Deal about growth
Dell CFO Brian Gladden noted that Perot "is a great anchor acquisition for Dell" and its platform can be applied to other industries.

Gladden said that "growth is the primary motivation for this transaction."

Aside from utilizing Perot's foothold in health care and government agencies, Dell said that the two companies can grow faster and build "next-generation capabilities."

Dell also added that Perot can enhance the company's ability to bring next-generation data center and virtualization capabilities to customers. Think of the deal as one big cross-selling proposition. Dell can leverage Perot's health care and government customers to sell more hardware. Perot, which only has 27 percent of its revenue tied to commercial accounts, gets Dell's enterprise heft.

The big question is whether Dell can take Perot's capabilities and extend them to other industries. If it can, Dell may succeed at delivering the growth it's hoping for.

In a graphic, Dell's big plan for Perot looks like this:

Larry Dignan/ZDNet

While Dell's plan for Perot Systems looks good on paper it will remain a small services player relative to rivals.

Dell said that it can bolt together Perot's services business with its own and create a global services company. However, today the Dell-Perot services business is an $8 billion unit. "We can make a different services company with a new set of capabilities," said Dell.

Larry Dignan/ZDnet

Dell will have to deliver new capabilities if it's to enter the big leagues in services. For instance, IBM's global technology services unit had $39.3 billion in revenue in 2008 with its global business services division delivering sales of $19.6 billion. As a result, IBM doesn't have to rely on its hardware business as much as Dell does.

It's a similar story for HP, which bulked up its services via the purchase of EDS. For the nine months ended July 31, HP's services revenue was $25.7 billion. Of that sum, infrastructure technology outsourcing and technology services represents the bulk of the revenue pie.

Dell's challenge: Scale Perot's services unit with "disruptively great value" so it can play catch-up to the big services guns.

Larry Dignan/ZDNet