New York: Dell Inc. on Monday agreed to buy information technology service provider Perot Systems Corp., long seen as a potential Dell target, for $3.9 billion (Rs18,798 crore) as the world’s No. 2 computer seller looks to expand on its core personal computer business.
The acquisition creates a company with $8 billion in services revenue as Dell seeks to better position itself among more diversified rivals such as Hewlett-Packard Co. and International Business Machines Corp. that already have substantial services units.
Stock gains: Ross Perot (centre) throws baseball caps with the Perot logo from the podium of the New York Stock Exchange on 2 February 1999, the day his company, Perot Systems Corp., was listed on NYSE. Henny Ray Abrams/AFP
Dell was widely expected to acquire an information technology (IT) services company following HP’s purchase of Electronic Data Systems in 2008.
In recent years, companies that supply computers and other hardware have been combining those products with services—such as providing customer support or managing data centres and computer networks—which offer new growth areas and recurring revenue streams.
Perot Systems was founded in 1988 by H. Ross Perot, who earlier created Electronic Data Systems and ran unsuccessfully for president of the US in 1992 and 1996. Perot Systems specializes in IT services and consulting, with nearly half of its revenue coming from the healthcare industry and a quarter from the government sector.
Dell will begin a tender offer to buy all the Class A shares of Perot for $30 a share, a hefty 68% premium to Perot’s closing price Friday of $17.91. Perot’s Class A shares haven’t been above $30 for more than a decade.
The deal is expected to close by the end of January but isn’t seen adding to Dell’s earnings until the fiscal year that runs through January 2012. In the first year, the deal is expected to reduce earnings modestly, company officials said in a conference call. In two years, Dell expects it will be able to cut 6-8% of $4 billion in combined costs between the two companies.
Dell shares fell 3.2% to $16.15, and Perot Systems added 65% to $29.63. Given the deal’s high premium and Dell’s cash position, it’s unlikely another bidder would approach Perot.
Dell already provides some IT services, but the vast majority of its revenue, around 80%, comes from corporate computer purchases. Perot will allow Dell to expand into more sophisticated services, such as building and managing large, complex computer networks.
HP, the world’s largest computer maker, purchased EDS last year for $13.9 billion at a premium of 33%, far less than the premium agreed to in Dell’s planned purchase of Perot.
Dell’s purchase of Perot is “a relatively expensive acquisition”, Shannon Cross of Cross Research said, adding that Perot is a much smaller acquisition than that of EDS by HP and more of a “bolt-on” for Dell.
Services focus: Dell Inc. chief executive officer Michael Dell. Harikrishna Katragadda/Mint
The higher price, she said, could also reflect that there were few other services companies for Dell to purchase. “There aren’t that many candidates out there,” she said.
Dell’s move follows months of speculation regarding whom Dell, which had $11.7 billion in cash as of 31 July, would buy in order to fill gaps or strengthen weak spots in its portfolio.
The talk increased this summer after Dell hired David Johnson, the former chief of mergers-and-acquisitions strategy at IBM, which tried unsuccessfully to block the hiring in courts. Dell added more financial firepower by selling $1 billion in bonds.
Dell is expected to expand Perot’s reach across the globe. Perot had been seeking to expand internationally to reduce its exposure to the U.S., and the two companies already work together on some projects. As the integration of Perot progresses, Dell expects to add smaller services acquisitions to bolster Perot’s geographic reach.
Perot will become Dell’s services unit and will be led by its current chief executive, Peter Altabef. Dell’s board will consider Perot chairman Ross Perot Jr for a seat.
Dell said retaining Perot Systems employees is critical to the acquisition’s success, adding that it has already signed long-term retention agreements with several senior executives.
Perot last month said second quarter profit rose slightly as improved margins helped offset a drop in sales. But it gave a third quarter revenue forecast below analysts’ expectations.
For this year, analysts on average project Perot’s earnings to rise 2% to $117.3 million and revenue to fall 9% to $2.53 billion, according to Thomson Reuters.
Dell’s profit dropped 23% for its most recent quarter as it continued to suffer from weak spending in technology, particularly by corporation. For the fiscal year through January, analysts see Dell’s earnings falling 22% to $2.08 billion and revenue dropping 15% to $51.63 billion.
George Stahl and Joan E. Solsman contributed to this story.