FAQ: What the Dell-Perot merger means for the IT industry

Network World - Dell on Monday announced a definitive agreement to purchase Perot Systems, the IT services company founded by Ross Perot in 1988. The acquisition, expected to close between November and January, greatly expands Dell’s reach into the IT services and support market, particularly in government and healthcare sectors. Here’s a look at some of the key questions related to the deal.

Dell is paying $3.9 billion for Perot Systems, a 68% premium over Perot’s actual stock value. Why does Dell think Perot is Networth such a high price?

Buying Perot is part of Dell’s plan to expand its footprint in the IT services market, which may be a necessity in a time when hardware sales are falling. The 2007 hiring of Stephen Schuckenbrock, former COO at Electronic Data Systems, was one of several moves signaling Dell’s intent to move further into the services industry. But the Perot deal is the strongest step yet in this regard.

“Over the last couple of years they have more or less created a platform for a true entrance into the service market,” says Forrester analyst Paul Roehrig. “They’re really over-exposed on the hardware side. “In a lot of ways, this is a natural extension of the trajectory they have been on.” (Read what analysts have to say about the acquisition.)

The Obama administration’s attempt to expand federally funded healthcare coverage is another consideration. Nearly half (48%) of Perot’s revenue comes from the healthcare industry, and 25% of Perot’s revenue comes from the government sector. By purchasing Perot, Dell immediately expands its penetration into both markets, which are likely to grow, Roehrig says.

“If you were betting a couple billion dollars, what industry would you bet on?” he says. “In North America and globally there’s a lot of technology enablement that has to happen in those spaces.”

Dell officials said they are also seeing demand from customers who want to virtualize their data centers and build private cloud networks, and buying Perot will significantly bolster Dell’s ability to serve those customers.

How will Perot be operated within Dell? Perot Systems will become the focus of Dell’s services business. Dell said it will combine its own services organization with Perot’s. The operation will be run out of Plano, Tex., Perot’s corporate headquarters, and will be led by Peter Altabef, Perot’s CEO. Dell has pulled in $5.1 billion in services revenue over the last year, while Perot did $2.6 billion in business, so the combined services organization has annual revenue of nearly $8 billion.

What will happen to Perot’s employees and leadership team? As with any acquisition, there will likely be layoffs to reduce overlap between the two companies. Dell officials say they expect to cut $300 million in costs out of the two companies over the next two years. Top executives are staying put, with Dell saying it has reached “long-term retention agreements” with both Altobef and “critical members of his senior leadership team.” Perot has 23,000 employees.