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Dell plus Perot - It's a start

But what about the finish?

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Eight billion dollar backlog

Perot Systems has an $8bn services backlog right now, and Dell itself has a $5.8bn "preferred services" backlog, according to Dell (the man). This may seem like a lot of dough, but it is a tiny fraction of the $132bn services backlog that IBM had as it exited the second quarter of this year. That is more than a year and a third of revenue that Big Blue basically has in the bank.

In the first six months of this year, IBM has brought in $26.6bn in services sales, and maintenance was about 13 per cent of the total, or about $3.5bn. The rest of what IBM does is real services, and that business is over fifteen times as large as the combined "real" services businesses of Dell and Perot Systems put together (provided IBM's final two quarters of 2009 look like the first two).

While Dell (the man) said that the Perot Systems acquisition was the right deal - and merging two Texas companies is usually a good idea, and one that Dell probably should have thought about a decade ago before HP bought Compaq - it is also fair to say that this was the largest services acquisition that Dell could afford. And it is also fair to say that Dell is going to have to make a bunch of niche acquisitions to take on targeted markets like government and healthcare, where Perot Systems is strong but facing intense competition from IBM and HP, who want to get on the economic stimulus gravy train and ride it from Washington to Wall Street.

Ross Perot Jr. said in the call that his M&A team was "very excited" to have access to Dell's balance sheet to do deals for this very reason, since Perot Systems was not large enough itself to do big deals to grow inorganically to take on the competition in services. At the end of June, Perot Systems had $291m in cash and equivalents and $38m in short-term investments. That's not much of a war chest to make big acquisitions, and Perot Systems has not exactly been throwing off bales of cash in the past four quarters, with a net income of $118m over the past four quarters against that $2.6bn in sales (about 4.5 per cent of revenue).

Dell, on the other hand, had $12bn in cash and short-term investments and $3.4bn in debts at the end of July, and it will still have $4.7bn in net cash after doing the Perot Systems deal and paying off its debts (if it decides to do that, which it won't so it can do other acquisitions as the economy is still sour).

Perot (the man) said that about 27 per cent of the company's revenue comes from selling services to governments around the globe (the business that made EDS large and that eventually compelled IBM to form an arms-length subsidiary to sell services to the U.S. government) and that it had a very big healthcare practice as well, one with a special emphasis on business process engineering for healthcare providers.

One of the strengths of EDS and Perot Systems over the past two decades is that they have been standalone companies, ones with no obvious ties to any specific platform vendor, even if they did have strong alliances with a few of them. The question now is will the HP acquisition of EDS and the Dell acquisition of Perot Systems hurt sales because of the parent companies' obvious platform preferences - or does it come out to be a net gain? One of the reasons why these two free agents had done well might have been precisely because they were not tied to a vendor, like the IBM, HP, Sun Microsystems, Unisys, and Fujitsu IT services business obviously are.

No matter what, the Perot Systems deal makes Dell bigger and gives it a better toehold in healthcare and government IT. You could hardly find a better place to try to shake up the incumbent platforms. The issue that Dell faces now is that $4.7bn doesn't buy a big enough services company to make Dell more of a key player in this industry. Dell could acquire the services business of Sun from Oracle and maybe acquire the same biz from Unisys and spin out its mainframes to IBM, Fujitsu, or Hitachi. These are moves that Dell can afford. ®

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