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

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.

Is Ross Perot still involved in Perot Systems? The 79-year-old Perot has served as chairman emeritus of the company’s board since September 2004. Perot, a former presidential candidate and a major figure in the IT services industry for nearly five decades, is also the founder of Electronic Data Systems, which was purchased by HP. (Slideshow: Techies turned politicians

Perot’s son, Ross Perot, Jr., is a former CEO of Perot Systems and is now chairman of the Perot board of directors. Perot, Jr. will be considered for appointment to the Dell board after the acquisition closes, according to Dell.

Should competitors in the IT services industry be worried by the Dell-Perot combination? The acquisition “definitely makes a statement,” says Gartner analyst Dane Anderson, and gives Dell new expertise in the healthcare and government markets. But the merger is not a guarantee of success. “Whether they suddenly become the next big competitor to IBM, Accenture, or HP EDS, that remains to be seen,” he says.

Size-wise, Dell’s services organization still pales in comparison to some competitors. HP, having purchased EDS, does $40 billion in services revenue, Anderson says. IBM is even bigger with $57 billion in services revenue.

With EDS and Perot now off the block, are there any other IT services firms that might be acquired? Yes, but which company might get acquired next is anyone’s guess, Anderson says. Companies like CSC and Accenture could be takeover targets, but the same could be said of numerous services vendors.

“The reality is, I’m not sure anyone is out of play,” Anderson says. “The issue is who has got the intestinal fortitude and cash to make things happen.”

HP and IBM obviously have the cash. But HP already acquired EDS, and IBM has such a large services organization that further growth will be difficult to achieve.

“I don’t think IBM will acquire a big services company, but it’s not necessarily ruled out,” Anderson says. “IBM already has $57 billion, $58 billion in services revenue, so how do you grow that effectively, especially when there are many fewer billion-dollar plus deals out there? You really have to find a way to create volume in those smaller deal sizes.”

Can we expect Dell to make more acquisitions? Yes. Dell was able to expand its ISCSI storage business last year by purchasing EqualLogic and has indicated a willingness to continue expansion through acquisition.

“We’re looking for more things like EqualLogic which build on strong IP and allow us to extend the significant customer reach we have,” Michael Dell, chairman and CEO of the company, said in a conference call Monday.

Should Dell and Perot customers have any concerns about the merger? Customers should always examine the potential ramifications of an acquisition, analysts say. One question is whether Dell will pressure clients to use Dell hardware rather than servers and storage from Sun, HP or others.

But on balance, customers have reason to expect that the Dell-Perot combination will provide new opportunities or at least not be harmful.

“With these kinds of integrations, clients get nervous,” Roehrig says. But “customers shouldn’t panic about this. In fact, they should look at it as an opportunity to see if it remains a good fit and see if they can generate additional value for their own firms based on [the combination of Dell and Perot].”

Customers of service companies that have close partnerships with Dell’s hardware division may have reason to be nervous, however. “If my service provider is really relying on Dell, that’s something I’d worry about,” Roehrig says.

This story, "FAQ: What the Dell-Perot merger means for the IT industry" was originally published by Network World.

Copyright © 2009 IDG Communications, Inc.

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