3rd UPDATE: Dell To Buy IT Service Provider Perot For $3.9 Billion
September 21 2009 - 10:39AM
Dow Jones News
Dell Inc. (DELL) agreed Monday to buy information-technology
service provider Perot Systems Corp. (PER), long seen as a
potential Dell target, for $3.9 billion as the world's No. 2
computer seller looks to expand on its core personal-computer
business.
The acquisition creates a company with $8 billion in services
revenue as Dell seeks to better position itself among more
diversified rivals such as Hewlett-Packard Co. (HPQ) and
International Business Machines Corp. (IBM) that already have
substantial services units.
Dell was widely expected to acquire an IT services company
following H-P's purchase of Electronic Data Systems in 2008. In
recent years, companies that supply computers and other hardware
have been combining those products with services - such as
providing customer support or managing data centers and computer
networks - which offer new growth areas and recurring revenue
streams.
Perot Systems was founded in 1988 by H. Ross Perot, who earlier
created Electronic Data Systems and subsequently ran unsuccessfully
for president of the U.S. in 1992 and 1996. The company specializes
in IT services and consulting, with nearly half of its revenue
coming from the health-care industry and a quarter from the
government sector.
Dell will begin a tender offer to buy all the class A shares of
Perot for $30 a share, a hefty 68% premium to Perot's closing price
Friday of $17.91. Perot's class A shares haven't been above $30 for
more than a decade.
The deal is expected to close by the end of January but isn't
seen adding to Dell's earnings until fiscal 2012. In the first
year, the deal is expected to be "modestly dilutive," company
officials said in a conference call to discuss the acquisition. In
two years, Dell expects it will be able to cut roughly 6% to 8% of
$4 billion in combined costs between the two companies. Dell
reported the second quarter of its fiscal 2010 last month.
Dell shares fell 3.2% to $16.15, and Perot Systems added 65% to
$29.63. Given the deal's high premium and Dell's cash position,
it's unlikely another bidder might approach Perot.
Dell already provides some IT services, but the vast majority of
its revenue, around 80%, comes from corporate computer purchases.
Perot will allow Dell to expand into more sophisticated services,
such as building and managing large, complex computer networks.
H-P, the world's largest computer maker, purchased EDS last year
for $13.9 billion at a comparatively lower premium of 33% to Dell's
purchase of Perot.
Dell's buy of Perot "was a relatively expensive acquisition,"
Shannon Cross of Cross Research said, adding that Perot is a much
smaller acquisition than that of EDS by H-P and more of a "bolt-on"
for Dell. The higher price, she said, could also reflect that there
were few other services companies for Dell to purchase.
"There aren't that many candidates out there," she said.
The move follows months of speculation as to whom Dell, which
had $11.7 billion in cash as of July 31, would buy in order to fill
gaps or strengthen weak spots in its business products
portfolio.
The talk increased this summer after Dell hired David Johnson,
the former chief of mergers-and-acquisitions strategy at IBM, which
tried unsuccessfully to block the hiring in courts. Dell added more
financial firepower by selling $1 billion in bonds.
Dell is expected to expand Perot's reach farther across the
globe. Perot had been seeking to expand internationally to reduce
its exposure to the U.S., and the two companies already partner on
some projects. As the integration of Perot progresses, Dell expects
to add smaller services acquisitions to bolster Perot's geographic
reach.
Perot will become Dell's services unit and will be led by its
current chief executive, Peter Altabef. Also, Dell's board will
consider Perot Chairman Ross Perot Jr. for a seat.
Dell said retaining Perot Systems employees is critical to the
acquisition's success, adding that it has already signed long-term
retention agreements with several senior executives.
Last month, Perot said its second-quarter profit rose slightly
thanks to improved margins despite a drop in sales, but it gave a
third-quarter revenue forecast below analysts' expectations. For
2009, analysts on average project Perot's earnings to rise 2% to
$117.3 million and revenue to fall 9% to $2.53 billion, according
to Thomson Reuters.
Meanwhile, Dell posted a 23% profit drop last quarter as it
continues to suffer from weak spending in technology, particularly
by corporation. For Dell's fiscal 2010, which ends in January,
analysts see earnings falling 22% to $2.08 billion and revenue
dropping 15% to $51.63 billion.
-By Jerry A DiColo, Dow Jones Newswires; 212-416-2155;
Jerry.Dicolo@dowjones.com
(George Stahl and Joan E. Solsman contributed to this
article.)