Eye on M&A

Dell-Perot, headed for the clouds?

Long-expected deal deemed essential to computer maker's survival

Is there anyone on the planet who doesn’t know? The Web last month was abuzz with the news: Dell Inc. bought Perot Systems Corp. for $3.9 billion.

More interesting are the questions that remain unanswered: Where to next? Is cloud computing a viable route? How well will the two businesses merge?

For all the headlines it occasioned, the deal, or one like it, was long expected, even necessary for survival. “We have this re-verticalization of the industry going on,” said Gordon Haff, principal IT analyst at Illuminata Inc. “IBM never really stepped away from it; Hewlett-Packard built up its services through its acquisition of EDS.”

Although Dell has a server business, it’s lighter than IBM Corp.’s, Haff said. It has a services business, but it’s limited in scope. It acquired a storage company — EqualLogic, in 2007 — but that’s not enough of a differentiator. “That’s really not looking like a tier-one company,” he said.

“Dell was part of the dying breed of pure hardware vendors,” said Eugene Zakharov, director of Technology Business Research Inc.’s Professional Services Business Quarterly. “Hardware vendors have realized that they can’t survive alone,” he said. “Everyone needs to layer on some extra value.”

Other hardware vendors, including IBM, Hewlett-Packard Co., Fujitsu Ltd. and Unisys Corp., have already moved into other complementary, higher margin areas such as services and software, which are key to their differentiation and survival, Zakharov said.

And the Perot strength in government and health care markets are a good fit. Both are areas in which Dell has expressed interest. Speaking at a February conference, Michael Dell, founder and chief executive officer of Dell, said, “When I go to a doctor’s office, I see lots of files. You see more technology at the grocery store.”

Perot’s health care services complement Dell’s software and that will help drive growth for both, Zakharov said. But further, “Perot offers a strong brand name in the services, both commercial and public, and you need that to change people’s perception about your hardware business and your ability to serve and deliver on your services commitments,” he said.

Dell beefed up its services division in January with its purchase for $12 million of Allin Corp.’s Microsoft information technology consulting and collaboration and business applications services businesses. It offers consulting, support and life-cycle services.

“We tend to use the term ‘services’ like it’s some homogeneous entity,” Haff said. “It’s not like there’s a ‘services’ box Dell can check off by buying Perot.”

Integrating the two companies’ operations will also present challenges. Dell has not been very acquisitive, although the June hire of David Johnson, a mergers and acquisitions guru at IBM for nine years, should help.

“Assuming the integration of Perot services, the next question becomes what Dell does next in software,” Haff said.

Send in the clouds

“Next” could well be cloud computing, said Andi Mann, vice president of research at Enterprise Management Associates Inc.

“Dell has got a significant competitive landscape to deal with,” he said. IBM’s Global Business Services, HP Business Services (formerly EDS), and the Sun-Oracle merger offer stiff competition. Dell has been talking about cloud for awhile, he said, “and the Perot acquisition gives them the opportunity to start doing cloud computing.”

IT budgets in many sectors are down, Mann pointed out, “but two of the few areas showing real resilience are government and health care, where Perot is strongest. So in many ways it would seem to be an ideal time for Dell/Perot to come out with a fully baked cloud-computing solution.”

The company isn’t there yet, he said. “They’re restricted in several areas, including security. At EMA right now, we’re looking at what we call the responsible cloud. That means a solution that has the right compliance to privacy requirements, the right security and the guarantees around government regulations, and those aren’t really there now.”

But meeting those requirements is just the price of entry, Mann said.  “At EMA, we’re also looking at things like maintaining service levels and performance guarantees. There’s a lot more that needs to do be done.”

Assuming Dell can put together a secure, high-performance private cloud solution and leverage its newly expanded services division to offer it as a managed service, there is an opportunity, he said.

That’s a big assumption, Zakharov said. “Together they have no real networking, no software, and it’s going to take time to develop anything like a mature cloud-computing solution.”

The right strategic acquisitions could shorten that time. It’s a strategy Dell seems open to; Michael Dell in a call with analysts said he was in the market for an IP-based acquisition. As of July, Dell reportedly had about $11.7 billion in cash.

But even if Dell can afford to buy another big company, "I don’t know if they could absorb it,” Zakharov said. “What remains for Dell and Perot to do is figure out how best to leverage each other’s strengths.”

Whatever they decide to do, they need to do it quickly, he said. “The competitive landscape demands it.”

When the deal closes — sometime in Dell’s fourth quarter, which ends in January — Perot will be known as “Perot Systems, a Dell company.”

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