Stan Lepeak, EquaTerra Managing Director of Research, and Lee Ann Moore, EquaTerra Chief Marketing Officer

Dell announced today (Monday, September 21, 2009) that it will acquire information technology (IT) service provider and outsourcer Perot Systems in a deal valued at $3.9B, a hefty 68 percent premium from Perot Systems’ Friday closing share price. The deal is not a surprise given Dell’s long desire and need to get stronger and larger in the corporate IT services space and move beyond basic support and maintenance work for its own products. Major Dell competitors like HP and IBM have significantly larger and more diverse services businesses that not only bring in more revenue at higher profit levels but also can serve to pull through product sales. Perot Systems, while a successful and profitable firm especially in the healthcare space, has struggled to keep up with the competition on growth and depth of services (for example, it has done little in the faster growing BPO space), including Indian service providers, and saw its revenue shrink in the first six months of 2009 compared to 2008. So while not a surprise move the question remains about additional value it brings to the market.

The services market for larger clients offering integrated hardware and services could use a new entrant. This is a hardware intensive market, a factor we don’t see changing for quite some time. Cloud computing is receiving lots of media attention, but we are seeing it take little traction in the large enterprise market. Enterprise clients will benefit from having another hardware and services company besides IBM and HP/EDS. Another unanswered question, ‘what does this do to the remaining IT services partners with Dell out of the equation?’ For the growing number of buyer organizations that are looking for bundled solutions – products plus services – the acquisition is positive.

The move also appears to be positive for Dell clients looking for more depth and holistic offerings from Dell. While growing the legacy Perot Systems’ client base, Dell must use caution not to alienate hardware clients who are using other service providers for outsourcing services. Relative to Perot Systems’ clients, we do not anticipate major short term disruption, and longer-term we expect these clients will have access to a stronger and more comprehensive service provider. Perot Systems’ clients will need to carefully assess the ultimate impact the deal has on hardware options outside of Dell, and the opportunity to likely reduce costs upon renewal with Dell as the hardware option, if not currently the hardware incumbent.

Longer term, and after any initial disruption is addressed, we expect the integrated services and tighter operating model will create an ultimately more profitable service provider – one that is sustainable and retains more clients. This combination should keep HP and IBM on the watch as this enterprise market could use another mega-provider. Whether Dell/Perot can use this combination to offer the enterprise client a competitive offer remains to be seen. The Dell/Perot Systems combination has the potential to make strong in-roads into the mid-market by providing the hardware and services integration with the level of sophistication expected in the mid-market yet not the massive scale needed by the larger providers. Dell and Perot Systems can exert pressure in this sector, and if played right, could see their market share increase in the mid-market in both products and services.

The integration of Perot Systems into Dell from an operational and cultural standpoint is an issue both sides need to carefully and openly address. Integration of a services firm is always challenging, though Perot Systems business is less people based than a pure consultancy (like the IT services business of PwC that IBM acquired earlier in the decade). The services businesses of the two firms are largely complementary, and thankfully each firm has grown well beyond its roots – from the Ross Perot-type workhorse, GM-based culture of Perot Systems and the Dell ‘founded in a college dorm room’ persona. Dell also has a mixed track record in new ventures and has not successfully expanded its services footprint organically. Dell will be well served to ensure it retains the best and brightest from Perot Systems while simultaneously keeping it clear it is the acquirer and Perot Systems the acquiree.

Filed under: Market Trends and News, Outsourcing by EquaTerra