Dell Acquires Perot Systems

You know the IT market is challenging when a good buy is deemed to be a firm whose revenue has fallen by 10 percent in the last six months. But that's the bet being made by Dell, in its $3.9 billion cash offer for Perot Systems.

Dell has been hard hit by the economy. It derives more than 80% of its revenue from products, namely its line of desktops and laptop computers. The company's revenue fell almost 23 percent, and operating income fell nearly 37 percent, in the six months ending July 31. So, with the economic downturn continuing to delay the purchase of computers and related services, Dell needed a big move.

And investing in services makes sense. Dell's services practice, which generated $5.1 billion in the four quarters ending July 31, has seen only a modest dip. In the last six months, the group's revenue has contracted by less than four percent. The addition of Perot Systems offers a few significant upsides for Dell, most notably:

1. It will help Dell diversify its services offerings. All of Dell's current services are tied to its products. So, as goes computer sales, so go services. Perot offers IT strategy, ERP, and IT cost control capabilities. It also serves SAP and Oracle clients.
2. The deal will also provide Dell with key leadership. Perot CEO Peter Altabef will be the new head of Perot Services. Despite the fact that Dell's services business is almost twice the size of Perot's practice ($5.1 billion vs. 2.6 billion, in the firms' respective last four quarters), Perot's team will be running the business unit. In addition to Altabef, retention packages will be offered to all of Perot's leadership team, a Dell spokesman confirmed to Consulting.

Despite these benefits, the deal is not without its challenges. According to Perot's latest quarterly earnings filing, "The current general economic downturn has adversely affected the levels of business activities in the industries and geographies where we operate, and has reduced demand and pressured pricing for our services, especially with respect to discretionary project services. In a severe or prolonged economic downturn, more of our clients could become unable to meet their financial obligations to us under the terms of our existing services agreements, could decide to downsize, or could defer or cancel contracts, all of which could have a material adverse effect on our results of operations or financial condition."