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Dell plus Perot - It's a start

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Analysis Dell's $3.9bn acquisition of Perot Systems comes after two years of sweet talking by Dell chairman and chief executive officer, Michael Dell. While adding the Perot services business to Dell's own will certainly help the PC, server, and storage maker on a number of fronts, the acquisition will almost certainly not be the last acquisition by Dell as it takes on bigger players in the IT racket.

In a conference call this morning after the announcement of the deal, Dell (the man) said that this was "the right acquisition" for the company to make, one that he started pursuing in 2007 with Ross Perot Jr., the son of the company's founder, former presidential candidate, former IBMer, and founder of Electronic Data Systems. "This has not been a new idea," Dell said in the call. And he added that David Johnson, the ex-IBMer and mergers and acquisition expert that Dell hired earlier this year, prompting a lawsuit from Big Blue, was not involved with the deal.

Dell said that over the summer, talks between himself and Ross Perot Jr. intensified and that the two worked out a deal that gave Perot Systems the premium that the Perot family and other key shareholders wanted (67.5 per cent above last Friday's closing stock price and 50 per cent larger than annualized revenue) as well as an agreement by the key leadership of Perot Systems to stay on board after the acquisition.

EDS, you will remember, was the first standalone services company, founded in 1962 after the original Henry Ross Perot floated the idea to his bosses at Big Blue and they rejected the idea. (This is the same IBM, after all, that once thought maybe a handful of electronic computers would be installed worldwide). After selling off EDS to car maker General Motors in 1984 for $2.4bn, Perot (the father) hung around the GM board being a gadfly until GM decided to rid itself of EDS through a spinout in 1996.

Last May, Hewlett-Packard shelled out $13.9bn to acquire EDS, with an army of 136,000 employees, yielding an overall HP services business with $38bn in global sales and 210,000 employees. (Well, before the layoffs started, anyway). In 1988, Perot (the father) started a new IT consulting company from scratch, and it has been growing steadily over the past two decades. But Perot Systems is still utterly dwarfed by the services businesses of HP and IBM.

What Dell and Perot Systems announced today is just a fun-size version of the HP-EDS deal, and it doesn't look like Dell is interested in layoffs on the scale of the 24,600 that HP instituted in the wake of its EDS acquisition. Dell said that the combined services units of his company and Perot Systems had a cost base of about $4bn and that somewhere around 6 to 8 per cent of those costs could be wrung out over two years through reduced IT spending (now Perot Systems will get X64 servers and storage at cost), shared delivery models, and other synergies. And, Dell said, these savings would be reinvested in growing the services business, which will be now located not in the Round Rock headquarters for Dell outside of Austin, Texas, but in the Plano, Texas, suburb north of Dallas.

Dell's enterprise services business, you might be surprised to learn, is already nearly twice as large as the aggregate revenue stream from Perot Systems. In the prior four quarters, Dell has booked $5.1bn in services revenues, compared to Perot Systems' $2.6bn in revenues. Dell's chairman said that about 71 per cent of the company's services revenues come from product support, which is about $3.6bn.

So true IT services - installing and managing systems for people - only accounts for $1.5bn on an annual basis for Dell over the past twelve months. Of that $1.5bn, about $410m comes from consulting and just over $1bn comes from product lifecycle management services - meaning upgrades and garbage disposal. So what the Perot Systems deal really means is that Dell will be able to increase its real professional services business by a factor of six.

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