Keeping up with the Joneses

by Vault Consulting Editors | September 22, 2009

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Dell is playing an aggressive game of catch-up. This week, it announced the purchase of IT consulting firm Perot Systems, following not closely enough on the heels of its tech rivals HP Services (which bought EDS last year), Oracle (although the completion of its purchase of Sun Microsystems was recently brought into question on the grounds that it violates antitrust regulations) and IBM. IBM was an early pioneer of the trend to bring software and services under the same roof, with its purchase of PwC's consulting wing back in 2002 and its strategic retreat from the PC-first mentality. But that path has become fairly routine nowadays, as big tech firms have come to realize that diversification is the key to survival. And as Dell seems to have just recently discovered, those who don't follow suit will be left out in the cold.

What's most notable about Dell's acquisition is the hefty price tag that came with it—$3.9 billion, or the equivalent of 29 times Perot's 2010 consensus earnings and a 68 percent premium on Friday's close. But Dell doesn't have much room for negotiation, considering the 23% drop in first-half revenue it witnessed and its dwindling PC business. The deal is expected to close in January 2009.

"If they'd been out ahead of this thing, they probably wouldn't be paying a high price, and they might not be buying Perot," said Peter Bendor-Samuel, whose company, Everest Group, has consulted with Dell on services strategy. One of the risks for Dell in the Perot purchase is that the services company is not as large as those that Dell's competitors have picked up, which will reduce its overall footprint in the global market. Dell founder and CEO Michael Dell has hinted that his firm will supplement this expansion by buying up additional services companies.

To keep playing with the big dogs, Dell will have to diversify its business and get a piece of the services action that its peers have already bitten into.

Filed Under: Consulting

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