Dell buys Perot: Following the money

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How valuable is your IT department? How much should you do yourself and how much should you outsource or contract out?

Dell’s shock acquisition of Perot Systems, raises a host of questions, not least those around the cost organisations pay for services.

Dell is buying Perot to get into services, and it is paying heftily to do so. Over at Techmarketview, Anthony Miller has, as usual, a pretty astute initial take:

Dell is to buy Perot Systems for $3.9b cash, a near-70% premium to Perot's closing price on Friday. This is landscape-changing stuff - for both parties. The news release claims that “Dell and Perot Systems share several key characteristics and our products, services and structures are overwhelmingly complementary”, which is not the way I would describe the situation, especially regarding products and services!

OK, so Dell wants to ‘do an HP’ and get into ‘grown up’ services. This itself is a dodgy decision - way beyond its 'knitting'. Putting this 'small' point aside, HP was part of the way there in terms of ‘enterprise services’, though had nowhere near the scope and scale of EDS. But Dell is surely even further distant than HP, and Perot is hardly the standard-bearer in the field. I just can’t see at the moment where this is any sort of natural fit.

On the financial side, Dell is paying 1.4x Perot’s 2008 revenues and 21x 2008 operating profit which just sounds so over the top. When HP acquired EDS in May ’08 for some $14b, this represented a 33% premium to EDS’ closing price and about 0.6x EDS’ prior year’s revenues.

Now Michael Dell is no fool, but this represents something of a u-turn on his part. Dell is the king of commodity IT, with production driven by remorselessly honed processes.

Services has always been a bolt on to Dell’s offering – a way to open doors for a hardware sell or to find out what enterprise customers want and need, so as to produce the right commoditised products.

Now Dell, like every other hardware supplier, knows the money is in software and services, hence the premium he is paying for Perot Systems.

This brings me back to my original point. If Michael Dell is following the money and moving wholesale into services, are you paying too much for your software and services?

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