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By Nick Wakeman

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Nick Wakeman

Perot deal kicks off Dell's evolution

Dell’s proposed acquisition of Perot Systems is striking for several reasons.

The most compelling from my perspective is that it sends a clear signal to the market – both government and commercial – that Dell wants to be a services player. In fact, it has to be if it wants to continue to be relevant.

The hardware business is tough and getting tougher. I’m not going to argue perceptions, but the common view is that a laptop or a PC or even a server is virtually the same no matter what nameplate is on the box.

When that is how your customer sees you, the buying decision is so heavily weighted to lowest price that the ability to boost your margins with any kind of value-add is nearly impossible.

Now Dell already boasts billions in services work but the Perot acquisition gets them well beyond installations and so-called “break-fix” services. Perot brings them consulting and outsourcings services that potentially can offer much higher margins than selling boxes.

But to succeed, the Perot deal cannot be a one-time event, and Michael Dell said has much when he talked about more acquisitions being in the works.

The government market represents about 28 percent of Perot’s business and for Dell the percent is significantly less. They don’t break out that amount but our Top 100 analysis pegged Dell at about $1.9 billion in fiscal 2008.

But I think the government market will continue to represent a strong buying opportunity for Dell as it builds a services business.

The government market is a stable environment with a plethora of services companies. It is a target-rich environment. Dell can add customer sets and services capabilities and not make a significant dent in the billions in cash it will still have after the Perot deal.

They specifically mentioned health care as an area of expansion but other areas that have both commercial and government components are cyber and physical security, authentication and identity management, education, human resources and human capital, and, of course, data center outsourcing.

Dell has not been as an acquirer in the services space, but the team they have brought on from Perot has several under their belts.

But there are risks for Dell. One of the biggest being the need to juggle two distinct business cultures – the sales and manufacturing culture of Dell with the services culture of Perot. Both cultures work, but what works in one doesn’t automatically transfer to the other.

They need to be careful about how they incentify employees, how they manage customer relationships and who they hire going forward.

I’m sure what I’m saying won’t be a surprise for the folks at Dell. When they hired IBM’s former mergers and acquisition chief, they showed they know a good model when they see one.

While it may be years before Dell’s service’s business can rival IBM’s, the evolution from a hardware manufacturer to a multifaceted product and services provider has begun.

Posted by Nick Wakeman on Sep 22, 2009 at 9:53 AM

Reader Comments

Wed, Sep 23, 2009 Scott McLean

It's clearly not imminent, but it will interesting to see how long it takes before Dell sells their product business because the lower margins are bringing down their street value.

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