A Shopping List for Dell

by: Eric Savitz

The time has come for Dell (NASDAQ:DELL) to do a “transformational” acquisition, UBS analyst Maynard Um asserts in a research note Wednesday morning. He thinks the company needs to reduce its focus on commoditized hardware and make a move into higher margin services and software.

This is not a new idea: back in December, Avian Securities analyst Avi Cohen weighed in with some acquisition ideas; his list included Sun Microsystems (JAVA), which of course has agreed to be acquired by Oracle (NASDAQ:ORCL), and Data Domain (DDUP), now the subject of a tug-of-war between EMC (EMC) and NetApp (NASDAQ:NTAP). Names from his list that haven’t yet been swallowed include CommVault (NASDAQ:CVLT), Compellent (NYSE:CML) and 3Par (NYSE:PAR). Others have made alternative suggestions. Bernstein has proposed the company buy Acer, for instance. And of course, there have been rumors that they might buy Palm (PALM)

Um notes a series of signals that M&A is receiving new scrutiny at Dell:

  • April 2009: Sells $500 million of 5-year notes, with proceeds targets for potential acquisitions, among other things.
  • May 2009: Hires IBM M&A chief David Johnson.
  • May 28, 2009: Says on earnings call that “asset prices are gettign pretty attractive.”
  • June 10, 2009: WSJ piece quotes Michael Dell saying it expects to make a significant acquisition in the coming months.
  • June 11, 2009: Sells $1 billion of debt, boosting cash to $11 billion-plus.
  • June 16, 2009: Busienss Week piece says division heads asked to look for acquisition candidiates.

Um goes on to review a list of potential candidates, shooting many of them down:

  • Computer Sciences (NYSE:CSC): Services provider could be good fit, but $8.7 billion enterprise value is pushing the limits of what Dell might be willing to do in terms of size.
  • Affiliated Computer Services (ACS): Like, Dell, based in Texas. He thinks the services player could be a good fit, but again with $6.3 billion EV, size could be an issue.
  • Perot Systems (NYSE:PER): Another services play, and another company based in Texas. About 50% focused in health-care sector. Ross Perot owns almost 25% stake; would likely want a big premium.
  • Unisys (NYSE:UIS): Ewww. Another possible services deal. Um suggests finding a company with “a better mix of higher valued added services.”
  • Citrix (NASDAQ:CTXS): Applications virtualization company has close ties to Microsoft (NASDAQ:MSFT), which could make an acquisition by a particular hardware vendor problematic. Also big, with $6 billion-plus market cap.
  • McAfee (MFE): Large consumer focus - 40% of revenue - makes deal less likely. Um says Dell better off focusing on service than security.
  • Salesforce.com (NYSE:CRM): Web-based SAAS focus not compatible with Dell’s hardware focus.
  • Acer: Buying Acer would add scale; but he thinks Acer’s management wouldn’t be interested, and that there would be cultural fit issues. Also, he thinks they should be diversifying away from PCs.
  • Palm: Um says checks find Dell is developing a smart phone. But he thinks the company would be better off focusing on enterprise business. Also says a deal would likely NOT be accretive, and would not provide new channels for Dell hardware.
  • CommVault: He seems to like this idea. It is modest in size - market cap $669 million - and the two are already closely tied, with Dell as a reseller already accounting for 23% of the company’s ‘09 sales.
  • 3Par: Another storage play. Storage spending likely to fare better than PCs and servers. In size, comparable to CommVault.

Got any other ideas? Let’s hear them.

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