Dell Pays A High Price To Play In Tech Services
September 21 2009 - 3:39PM
Dow Jones News
For Dell Inc. (DELL), trying to become a one-stop technology
shop comes at a hefty price.
The world's second-largest computer maker paid a steep premium
to acquire Perot Systems Corp. (PER), especially when compared to
Hewlett-Packard Co.'s (HPQ) similar acquisition of Electronic Data
Systems last year. But Dell needed a big move into
information-technology services to keep pace with H-P and other
rivals as computer profits dwindle. Perot Systems' position in two
still-strong markets - health care and government - makes the
company a particularly felicitous purchase.
Round Rock, Texas-based Dell will pay $3.9 billion, or $30 a
share, to buy the company H. Ross Perot founded in 1988. That
represents a 76% premium to Perot Systems' average share price over
the past month before the deal was announced, according to
Dealogic, and sent Perot shares up more than 65% to $29.58
Monday.
In buying Perot Systems, Dell follows rival H-P's plunge into
the services business with EDS (which, coincidentally, was founded
in 1962 by Ross Perot). That $12.8 billion acquisition, completed
in August 2008, represented a premium of 47% over EDS's one-month
average share price.
Based on the comparison, Dell's acquisition looks costly by a
number of valuation methods. BMO analyst Keith Bachman is "mildly
enthusiastic" about the deal but said the acquisition is expensive
based on a price-to-earnings ratio. Dell, he noted, is paying
roughly 29 times Wall Street's average earnings estimates for 2010,
while H-P paid 15 times EDS's 2009 earnings estimates.
On a price-to-sales basis, Dell's deal is 1.4 times Perot's
sales, while H-P paid 0.6 times EDS's sales last year.
But compared to H-P, it's more crucial for Dell to diversify its
revenue base into areas outside of its core businesses of selling
computers and servers to corporate customers.
Before its EDS purchase, H-P had a wide customer base selling
computers and services to consumers and businesses. Dell, however,
generated only 10% of its revenue through services in its most
recently reported quarter.
During a conference call with reporters, Chairman and Chief
Executive Michael Dell said his company plans to grow its
now-larger services business with smaller acquisitions and organic
growth.
And Perot Systems' focus on health care and government in the
U.S. could offer strong prospects as health-care reform bills wend
their way through Congress and government spending increases as a
result of federal stimulus packages.
Shares of Perot Systems haven't suffered the steep declines of
the broader markets over the past two years. Before Monday's
announcement, the stock was up 12% from September 2007,
significantly better than the more than 20% declines of broader
market indexes during the same period.
The Morgan Stanley Technology Index is down more than 15%, while
Dell has fallen 37% over that time frame.
In a note to clients, JPMorgan analyst Mark Moskowitz called the
acquisition a "good stepping stone" for Dell to move beyond its
reliance on personal computers.
"We do see the building block as being compelling, but the
purchase price seems relatively rich," he said.
In recent trading, Dell was off 73 cents, or 4.4%, at $15.96;
Perot Systems was ahead $11.64, or 65% at $29.55. Hewlett-Packard
was up 20 cents, or 0.4% at $46.35.
-By Jerry A. DiColo, Dow Jones Newswires; 212-416-2155;
jerry.dicolo@dowjones.com