Dell Pays Handsomely for Perot Systems

Interesting deal here. I own shares of Dell (DELL) and am neither thrilled nor too dismayed with this morning's announcement that they're buying outsourcing firm Perot Systems (PER) for $4 billion. Dell shares are down 4.5% today - partly down with the general market, and partly due to the rich price paid for Perot.

The cash offer of $30 per share is a HUGE premium to Friday's closing price of 17.91. Congrats to Perot shareholders, who are clearly big winners in this deal. This acquisition helps Dell expand further into the services segments, especially where Perot is big in healthcare and government.

Dell's $9 billion cash hoard is one of the major reasons to own the stock. That said, the cash needs to be put to better use than earning paltry interest with rates as low as they are. Figure the $4 billion used for this deal earned 2% or $80 million in interest. Well now they just bought Perot, and the company's $200 million in possible Free Cash Flow is a much higher 5% yield on that cash.

On this morning's call with the analyst community, questions focused on the deal's rationale and the price paid. Dell's suggestion that there were big opportunities for cutting costs were met with appropriate skepticism, as Perot is already a lean operation. As one analyst put it:

Why does acquiring a company with $300million in operating costs enable you to cut $300million in operating costs?"

Dell's response was that there's plenty of room elsewhere (besides Perot's $300 million in operating costs) to save money, such as combining data centers and improving delivery of services.

Another analyst on the call mentioned Dell's previous intent to acquire a company with higher margins than itself. The issue here is that EVERYBODY has higher margins than Dell! Perot's gross margin is about 17%, and operating margin about 7% - still higher than Dell.

Disclosure: Long DELL

Comments

[skeptic1:]

I hate this move by dell. They are 3 years too late in diversifying into services. I figured by now they would realize they missed the boat on this and focus on other strategies. I guess i was wrong.Perot is big in healthcare and govt contracts and on paper it looks like a good idea, but the timing and cost is brutal. The big services guys are laggards and when contracts start coming up for renewal we are going to see margin pressure in this space and much stiffer competition amongst ibm, hpq, and now dell for the contracts to be had. So, while ibm and hpq have benefited by having a nice service revenue stream to rely on in this crisis, the economic environment will eventually start to manifest itself in the bottom lines of their services units.

Dell just paid top dollar for a an it services company most likely right before the space starts to show chinks in its armor.

I will most likely short dell for the long haul because of this move.

Sep 21 06:38 PM

[Nettligent:]

Dell is desperate, frustrated, and keep digging a deeper grave it cannot climb out of.
It is a global slowdown, not just Dell. Focus on what you do best.

Sep 22 04:36 AM