Dell made a surprise announcement to acquire Perot systems for close to $4 billion. Perot Systems in a IT services firms, predominantly US centric with government and the health care verticals accounting for over 70% of its revenues. By acquiring Perot Systems, Dell is just trying to follow the footsteps of IBM and HP by being a player in the IT services organization.
In my view, this is not a great step for Dell and I am disappointed. Here are the pros and cons:
Vertical presence: Perot Systems may have a great presence in the U.S. government and healthcare but outside of these verticals and outside U.S. it is a very marginal player. The healthcare sector may see some headwind thanks to the impeding reforms but the healthcare sector has been slow to innovate and have less appetite for new IT technology and services.
Margins: First Perot Systems doesn’t have great margins; in fact its margins are lower than industry standards and the last 6 months the results have been disappointing. For the 6 months ending June 2009, Perot made $59 million on a sales of $1.3 billion, which translates to a net margin of just 4.5%. Last year Perot Systems earned $117 million on sales of $2.8 billion.
Synergy: It is likely that Dell’s plan is to use Perot Systems to undertake IT services within its enterprise customers. This looks tough, as both the organizations have a different sales/engagement model. There is no significant synergy, and no integration issues as well. Dell is a $60 billion business and the Perot IT services business is relatively insignificant.
Strategic fit: While the acquisition gives Dell a services outfit, it is unlikely to be a strong strategic fit. Dell’s competencies are in supply chain, direct marketing, agility to respond and being able to sell volume products. The services business is an entirely different kettle of fish and the verticals where Perot is strong — the government and the healthcare are not noted for being agile. How this acquisition could become the “anchor” acquisition for IT services is difficult for me to understand unless Dell is planning on a roll up strategy to acquire other IT services firms.
With this step Dell also seems to be going on a different path. All trends and figures indicate that Dell’s position is becoming difficult with new areas like cloud computing, SaaS and other developments. Dell needs to bolster its offerings in that space to contend with the likes of Cisco and IBM and the Oracle-Sun combination as all of them are beefing up their offerings on the server space.
A strong product focused organization with its unique DNA and specifically strong organization culture will have to contend with several hiccups to make sense of this acquisition. IBM, HP and other It services organizations are unlikely to be impacted.