Last month Dell made an offer for Perot systems at 30 dollars a share. A few things come to mind.
What is Michael Dell’s real motive? Is he buying a services company to be like HP (HP bought Electonic data systems a while back). The premise that Dell is buying cheap (due to equity market conditions) does not hold .Dell initially made a bid for 17-19 dollars and after 5 months of negotiation, jacked up the offer to 30 dollars per share. So why the premium?
My theory is that Dell is reinventing itself from a pure play pc maker to a services provider. According to the churchill conference, he is more interested in profit share than market share. Two major examples include the foray into the luxury computer market, the creation known as Adamo, hiring away Ron Garriques from Motorola to be the head of Dell’s consumer products group.
Dell is losing marketshare to companies like Acer, Asus and even HP. Instead of remaining in the lowest cost producer category, Dell decided to compete on the services side (where margins are fatter). Diversifying the revenue stream from pcs is a very smart move to do since the margins will be better on the software side than the hardware side. With technologies such as virtualization and online storage allowing people to do more with less hardware, it’s a good move by Dell to try to expand into this software arena. You can say that Dell was too late in changing their corporate strategy but you have to realize how hard it is to make “elephants” dance.
Another reason for the acquisition of Perot systems is that Dell and Perot have been working together to bring on medical records technology for hospitals. Currently Perot services over 1000 hospitals on their client list. This acquisition can provide a good entry point to expand sales to hospitals. Also the medical records industry can be a very lucrative field as revenues will be recurring due to service and maintenance contracts.
Dell is overpaying per dollar of sales to buy Perot compared to the HP/EDS acquistion however Dell Is most likely betting on explosive growth in the medical records industry and the cross selling opportunities that exist.
Usually turnarounds take a lot of time to play out so I wouldn’t hold my breath to watch the stock make any incremental price changes however it’s definitely something to watch out for.
Another thing to note is that Dell will be reasonably active in acquistions, it might be smart to look at companies in the software business as well as technology firms who deal with hospitals
links to the churchill conference:
http://blogs.barrons.com/techtraderdaily/2009/10/13/live-from-the-churchill-club-michael-dell/?mod=yahoobarrons
Tags: DELL
