Dell set to buy Perot Systems

Deal to expand firm's services

Michael Dell, chief executive officer of Dell Inc., and Ross Perot Sr., chairman emeritus of Perot Systems, shake hands Monday after announcing Dell's acquisition of Perot Systems for $3.9 billion in this photo provided by Perot Systems.
Michael Dell, chief executive officer of Dell Inc., and Ross Perot Sr., chairman emeritus of Perot Systems, shake hands Monday after announcing Dell's acquisition of Perot Systems for $3.9 billion in this photo provided by Perot Systems.

— Dell Inc. has agreed to buy Perot Systems Corp. for $3.9 billion, undertaking its biggest purchase ever to compete with International Business Machines Corp. and Hewlett-Packard Co. in computer services.

Dell, the second-biggest maker of personal computers, offered $30 a share in cash, about 68 percent more than Perot's closing price Sept. 18. The acquisition probably will boost profit in fiscal 2012, Round Rock, Texas-based Dell said in a statement Monday.

Chief Executive Officer Michael Dell is pushing into computer services as consumers and companies curb PC purchases to cope with the economic slump.Larger services units helped IBM and Hewlett-Packard withstand the recession better than Dell, whose sales slumped 22 percent last quarter. The new services business would have annual sales of about $8 billion.

"This was a move designed to try to catch up with its competitors," said Shaw Wu, an analyst at Kaufman Brothers LP in San Francisco. "They were behind in services and being vertically integrated. That's the model that's worked - providing the hardware, software and services."

Once the transaction is complete, Perot, based in Plano, Texas, will become Dell's services unit. The price is more than twice what Dell paid last year for EqualLogic Inc., which was the computer maker's biggest acquisition until now.

Perot jumped $11.65, or 65 percent, to close Monday at $29.56. Dell, which ranks second to Hewlett-Packard in PC sales, fell 68 cents, or 4 percent, to $16.01 on the Nasdaq Stock Market.

The acquisition of Perot, founded by former presidential candidate H. Ross Perot, mirrors Hewlett-Packard's purchase of Electronic Data Systems Corp. for $13.2 billion last year. EDS, the world's second-largest computer services provider after IBM, helped Hewlett-Packard increase services revenue 93 percent last quarter. Sales in the PC unit fell 18 percent.

Dell has relied on cost reductions to help prop up profit amid the recession. The company, aiming to save $4 billion a year, has farmed out 40 percent of manufacturing. Still, profit dropped 23 percent last quarter.

Perot, which sells services to industries including health care, reported an 11 percent drop in sales and a 3 percent gain in net income last quarter. The company expects to benefit from the U.S. government's plans for electronic health records, Peter Altabef, CEO of Perot, said in an April interview.

Perot signs multiyear agreements to maintain customers' computer systems and data centers, and manage software and Web sites.Hospitals, physicians' practices and health-insurance companies account for about half of sales, and government customers about a quarter.

"Perot Systems will be the flagship, foundational asset in services for us," CEO Dell, 44, said Monday on a conference call. The company may make smaller acquisitions after integrating Perot, he said.

IBM's sales fell 13 percent last quarter, while Hewlett-Packard's total revenue dropped about 2 percent. The companies have benefited from long-term services contracts to maintain corporations' computers and networks.

The Perot acquisition, while not subject to a financing condition, will need government approvals and the satisfaction of other conditions, Dell said. Dell expects to close the deal in its November-January quarter.

Perot's Chairman, Ross Perot Jr., may join Dell's board of directors. Goldman Sachs Group Inc. advised Perot on the transaction. Perot agreed to pay a termination fee of $130 million to Dell if it breaches the agreement.

Business, Pages 19, 24 on 09/22/2009

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