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Dell (DELL)
Dell's $3.9 Billion Acquisition for IT Services Company
Dell Inc. has been heading towards a change. Michael Dell has been hoping to transform the company since he stepped back into the CEO position in early 2007. And even as the economy has struggled and fallen into a recession, Dell has continued to talk about expanding and acquisitions. This morning, all this talk was validated, as a deal was announced between Dell and information technology services company Perot Systems (PER: Charts, News, Offers). Why has Dell been so eager to sign a deal such as this, and what effect could this deal have on the two companies?
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It has not been a secret that Dell has had its eye open for acquisition possibilities for quite a while. Earlier this year, the company hired the former mergers and acquisitions chief from IBM (IBM: Charts, News, Offers), and in the last few months has worked to raise nearly $1 billion though the selling of debt securities. Michael Dell himself hasn't been shy about talking about his acquisition hopes, mentioning his desire to make an acquisition in the IT services sector. And now, that is exactly what Dell has done, with the purchase of Perot Systems. At $3.9 billion, this is Dell's largest acquisition, and the company has high hopes for what the two companies can do together.
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As Michael Dell pointed out, these two companies obviously "complement each other." Perot Systems will also be able to provide Dell with IT support and other services, which it previously has not been able to provide to its customers as Dell has primarily focused on its personal computers. Dell is also hoping this arrangement might widen its customer base, as Perot Systems had a varied client base which included government offices and hospitals. Although this arrangement seems primarily to benefit Dell, the advantages for Perot Systems are that Perot's CEO will likely gain a spot on Dell's board of directors, as well as the high premium purchasing price which has delighted shareholders. This deal worked out to be a 68% premium over Friday's closing price, or $30 per share, and this high premium has launched Perot's stock so it is currently just shy of the $30 level.
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Although some may wonder why this deal so important to Dell that they would pay such a high premium, the short answer is that Dell is doing this primarily to remain competitive. While Dell had principally stayed focused on its computer products, many of its competitors such as Hewlett-Packard (HPQ: Charts, News, Offers) and IBM had created broader business models. And yet even with this acquisition, Dell is just beginning to branch into the services arena, and will still remain a novice in this field compared to Hewlett-Packard and others. But with a falling profit, which may now be just finally beginning to stabilize, Dell is desperate for a comeback. And since IT services tend to have a better profit margin than physical products, perhaps this could help Dell return to an increase in profits even sooner.
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Dell Discussion:
Dell (DELL) Overpays For Perot Systems (PER) - One investor voices his frustration with the amount that Dell is spending to purchase Perot Systems.
Dell's $3.9 Billion Bet on ObamaCare - This article speculates that a large part of Dell's motivation for purchasing Perot Systems comes from Perot's exposure in the health care industry, and an optimistic outlook for Obama's proposed health care plan.
Dell: Perot Systems purchase an 'anchor' acquisition; More deals likely - Some charts and graphs about how the two companies hope to merge their strengths into an even stronger company.
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