Bigger Isn't Always Better At Dell

| About: Dell Inc. (DELL)

By Brenon Daly

Bigger is better, right? That is often the rationale used by tech heavyweights who write multi-billion-dollar checks in their quest for ‘scale.’ Not so with Dell Inc. (NASDAQ:DELL) in its recent M&A activity. In each of the company’s acquisitions so far this year, Dell passed over large, publicly traded vendors that the company knew well in favor of much smaller (and much less pricey) rivals.

To add to its security portfolio, for instance, Dell on Tuesday reached for unified threat management (UTM) provider SonicWALL. While the acquisition brings significant UTM business to Dell, the $260m in trailing revenue is much smaller than the $440m or so UTM giant Fortinet (NASDAQ:FTNT) produced last year. But then, Dell only had to pay a reported 4.5 times trailing sales, compared with Fortinet’s current market valuation of 10x trailing sales. (In a rumor that turned out to be half right, we indicated last week that Dell might be looking to pick up Fortinet, in what would have been the second-most-expensive information security acquisition.)

Dell’s security purchase comes less than a month after the company used M&A to fill a long-standing blank spot in its storage portfolio: backup and recovery. In that transaction, too, Dell opted for a startup (AppAssure Software) rather than the major-league player in the market [CommVault (NASDAQ:CVLT)]. That decision was even more notable because Dell was CommVault’s largest OEM partner, accounting for some 20% of that company’s total revenue. CommVault shares currently change hands near their all-time highs, giving the vendor a market cap of $2.2bn. Dell didn’t release the price it paid for startup AppAssure, but it was likely one-tenth that amount.

We might contrast Dell’s shopping trips with fellow tech giant Hewlett-Packard Co. (NYSE:HPQ). For example, when HP wanted to add a SIEM product to its portfolio in 2010, it passed on any number of small SIEM providers as it settled on kingpin ArcSight, which was running at about $200m in sales – or nearly four times the revenue of any of the smaller firms. Similarly, it paid a double-digit valuation last summer for Autonomy Corp. The purchase of Autonomy, which was the largest software deal in seven years, brought nearly $1bn of revenue from the enterprise content management vendor.

Of course, those two behemoths – and their respective M&A styles – did bump up against each other in the tussle over storage giant 3PAR in 2010. Recall that Dell planned to take home the company before HP jumped the bid. A public bidding war followed. After several rounds of back-and-forth bidding, Dell dropped out, leaving HP as the buyer for 3PAR. In the end, HP paid nearly twice as much as for 3PAR as Dell had planned to pay – the deal printed at $33 for each 3PAR share, compared with Dell’s opening offer of $18 per share.