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By John Goff, CFOZone
The arms race in the profitable IT services sector is hotting up.
On Monday, Dell Inc. announced that is has agreed to acquire Perot Systems in an all-cash deal valued at roughly $4 billion. Dell will not have to finance the purchase: the Round Rock, Texas computer maker is currently sitting on about $12 billion in cash.
Dell is paying a stiff premium to acquire Perot. The company plans to offer $30 dollar a share to Perot stockholders. That’s a huge windfall for those investors, considering the 200-week moving average for Perot stock is just under $15.
But Dell founder and CEO Michael Dell defended the deal, saying he sees Perot Systems as “the foundation asset for [Dell’s] IT services.” Indeed, Brian Gladden, Dell CFO, went as far as to dub Perot “an anchor acquisition.”
Only time will tell if Perot indeed turns out to be an anchor for Dell -- or a millstone. Technology mergers are notoriously tough to pull off, and they often fail to generate forecast cost-savings or synergies.
Nevertheless, Dell’s purchase of Perot has seemed like a destined deal ever since rival Hewlett-Packard acquired IT services leader EDS in May 2008. That purchase cost HP $14 billion, but substantially ratcheted up the PC maker’s IT services business. IT services, which include things like systems support and back-office functions, tend to generate higher margins than computer sales.
Case in point: Dell’s current operating margin is around 5.3 percent; Perot’s is closer to 7.6 percent. HP’s operating margin is near 8 percent.
Once the acquisition is complete, Perot Systems will become Dell’s services unit. The division will be led by Peter Altabef, the current Perot Systems CEO.
Both Perot Systems and EDS were founded by former presidential candidate Ross Perot. His son, Perot chairman Ross Perot, Jr. will likely get a seat on the Dell board.
Dell expects the transaction to be accretive to the company’s GAAP earnings in its fiscal year 2012. While that’s a ways off, the acquisition gives Dell a huge leg up in the hunt for IT services contracts. Perot currently has about $8 billion in signed deals in its pipeline.
Most of those contracts are with health-care companies and government agencies. In fact, about three-quarters of Perot’s sales come from those two sectors, which are seen as recession proof. Thus, the Perot acquisition could help Dell smooth its revenue flow. PC sales tend to be cyclical and usually plummet during economic downturns.
Gladden said the two companies have about $4 billion in shared annual spending. The Dell finance chief believes the merger will eventually generate about $300 million in cost savings.
But those savings may be tough to come by. Perot is already a lean operation. About a third of its employees work in India, and the company’s annual spend on SGA is only $300 million or so.
Instead, the Perot acquisition is purely aimed at boosting Dell’s top line growth. “The revenue growth potential is significant,” said Gladden. “It’s better than other targets we looked at.”
Expect Dell to purchase some of those other targets as well. This is just the company’s opening salvo in the race for IT services dollars -- a race that began in earnest in May 2008.
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