Dell Pays a Lofty Price to Play in the Cloud with Perot Systems Bid

| Sep 24, 2009 | Managed IT Services | Competitive Update

| Analyst: Amy Larsen DeCarlo

Current Perspective: Slightly Negative
Vendor Importance: High
Market Impact: Moderate

Event Summary

September 21, 2009 -- Dell and Perot Systems have entered a definitive agreement for Dell to acquire Perot Systems in a transaction valued at approximately $3.9 billion. Terms of the agreement were approved yesterday by the boards of directors of both companies. Once the acquisition is complete, Perot Systems will become Dell’s services unit and be led from Plano, TX by Peter Altabef, the current Perot Systems Chief Executive Officer. Perot Systems provides services in areas including applications, technology, infrastructure, business processes, and consulting. The company serves health care, government, and other commercial segments, from SMEs to large global institutions.

Analytical Summary

• Current Perspective: Slightly negative on Dell’s planned acquisition of Perot Systems, because the nearly $4 billion buy looks to be excessively expensive. In the end, the deal may never produce the profits necessary to justify the steep purchase price. The pending deal does, however, have the potential to provide Dell with key consulting and other resources in areas such as cloud computing that the computer maker would need to get into the managed IT services game.

• Vendor Importance: High to Dell, because the company is decidedly late in adding IT services to its portfolio. If it intends to play in the space, it needs to catch up with rivals such as HP and IBM that have established and thriving IT services businesses. Dell is shelling out a nearly 70% premium to snap up one of the last remaining big integrators at a time when continued weak economic conditions and a global credit crunch raise the question as to whether Dell might be better served keeping the cash on hand and looking for alternatives.

• Market Impact: Moderate on the managed IT services sector, because the acquisition is not expected to close until later in 2009 or early in 2010, and it could be many quarters before its real effect on the landscape is clear. However, the planned Perot Systems purchase puts Dell on a playing field from which the computer maker has been noticeably absent. Over the longer term, the Perot Systems buy will either raise Dell’s competitive position by adding IT services to the company’s catalog or put a big drag on the company’s balance sheet (or possibly both).

CLIENTS ONLY

Current Perspective

Competitive Positives and Concerns

Recommended Vendor Actions

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Recommended Competitor Actions

• Current rivals and future competitors in the managed IT services space do not need to mount any kind of proactive campaign related to the pending acquisition at this time. However, competitors do need to understand in which market segments and regions they could find Dell becoming a factor in the coming quarters. North American-based providers need to be aware that Dell will try to expand beyond Perot Systems' vertical orientations in an attempt to penetrate more accounts in financial services and other heavily regulated sectors.

• IBM has built up extensive resources working with technology from multiple vendors, giving its global services unit a reputation for independence that will be hard for Dell to replicate. IBM should emphasize this technology-agnostic approach, while depicting Dell as a box vendor that is a latecomer to the services space.

• HP should contrast Dell’s somewhat limited resource set and geographic footprint with its own more global presence and expertise across a broad set of technologies, including data center transformation, unified communications and collaboration, and application management.

Recommended Competitor Actions

• Existing Dell customers, particularly those in the healthcare supply chain, should ask for more information about how the acquisition could benefit them. Clients should proceed with caution, however, since integration efforts can produce some immediate short-term headaches. With the right assurances, early customers of the newly merged companies could find themselves in a position to get favorable contract terms.

• Current Perot Systems clients need to find out how the union with Dell might affect them, and what advantages they might see from the merger. Customers should ask about future development efforts in cloud services and virtualization.

• Prospective clients of the Perot Systems/Dell union should wait to see how the integration of the two entities goes, and what specific services it produces, before signing up with the provider for any kind of significant engagement.

CLIENTS ONLY

Current Perspective

Competitive Positives and Concerns

Recommended Vendor Actions

| Client access - Full report in Managed IT Services | More information

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