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Dell crunches numbers on Perot deal

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In an effort to get Wall Street excited about the company again, Dell has committed to extract $4bn in costs from its operations between 2009 and 2011. That gets a bit tricky if Dell keeps acquiring companies, and it had to keep acquiring if it's gonna dig itself out of it commodity hardware corner, a place where a slick and fast supply chain and direct sales to the customer aren't enough to generate profits.

So what is Dell to do?

Dell held a conference call with analysts today to discuss the integration of services company Perot Systems, which Dell gobbled up eagerly in September for $3.9bn after taking three prior runs at the company since early 2007. Dell closed the deal in early November and began the process of integrating its own services unit with Perot.

The combination, known as Dell Services, is run by Peter Altabef, the head of Perot Systems. It has 42,000 employees (about 38 percent in "low-cost geographies"), supports nearly 15 million servers and over 2 million PCs, has an annualized revenue run rate of about $7.5bn, a services backlog of $7.4bn, and it has 5,000 SaaS customers. Because of the Perot Systems background in babysitting systems for local, state, and federal governments - particularly Uncle Sam - about 47 per cent of revenues come from the public sector, with 32 per cent coming from large enterprises and a relatively tiny 12 per cent from SMBs. The rest is accounted for by services sold to consumers.

Brian Gladden, Dell's chief financial officer, said in the call that the company will begin consolidating Perot's numbers into its own in the fourth quarter of fiscal 2010, which ends this coming January, and warned the Street that Dell would have pretax expenses of $120m to $130m in its fourth quarter and would incur further acquisition-related expenses of $20m to $25m per quarter throughout fiscal 2011. Dell will also be amortizing somewhere between $40m to $50m in intangibles relating to the Perot acquisition in the fourth quarter of fiscal 2010, and about the same amount in each of the four quarters of fiscal 2011.

The company also said it would have to take a charge of $80m to $120m related to the closing of its factory in Poland, which it offloaded to Taiwanese manufacturer Foxconn two weeks ago for $310m. Dell is also reportedly laying off 700 employees, or about 16 per cent of its 4,500-strong workforce, in its Kuala Lumpur, Malaysia PC factory. No word on what charges will be incurred for this.

The short-term plan for the Perot-Dell services mashup is to chase the two key markets where Perot has traction and Dell wants to peddle iron: government and healthcare. Gladden said that Dell had identified an incremental $150m in incremental revenue for the cross-selling of hardware and support at formerly independent Dell and Perot accounts and new solutions aimed at specific verticals in fiscal 2011.

This incremental revenue will grow to $370m in fiscal 2012 and $650m in fiscal 2013. Significantly, the companies have identified about $300m in costs that can be removed from the combination over those three fiscal years, which should mean Dell has a better chance at making services profitable.

Gladden was unapologetic for having paid a high premium for Perot (67.5 per cent above the market capitalization of Perot the day before the deal was announced), and he intimated that Dell would take its $10bn cash pile and do some more shopping.

"It's just a matter of finding something that makes sense and our ability to digest, which again that would depend on where the acquisition is," Gladden explained in the call. "If it is in the services space, we can digest small things right now. If it is in other spaces around the enterprise, we can probably do something a little bit bigger."

Looking ahead, Gladden said he believed that Dell could grow revenues between 5 and 7 per cent over the long term and generate operating income at or above 7 per cent of revenue while also delivering cash flow from operations that exceeds net income. ®

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