Dell pays $3.9 billion to acquire Perot Systems

13.56
Trefis
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With the $3.9 billion acquisition of Perot Systems announced today, Dell’s IT services business will be about 35% of Trefis estimate for Dell’s stock.

Perot Systems is an IT services provider that helps customers build and maintain IT systems.  The company also advises clients on IT projects and selection of IT vendors.  Perot’s four broad service offerings are:

1 Infrastructure Services – Perot helps build and maintain IT hardware and software (e.g. the technology “infrastructure”) on behalf of its clients.  The company does things like maintain data centers, monitor networks and operate IT service desks.  Typically Perot will have long-term multi-year contracts with its customers in this business

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2 Software Application Services – Perot builds and maintains custom software applications for its clients.  This helps the client by reducing the need to expand its IT workforce for software development projects

3 Business Process Services – Perot leverages its technology know-how to build and maintain more efficient business processes such as claims processing, life insurance policy administration and call center management

4 Consulting Services – Perot uses its in-house technology expertise to advise clients on technology strategy such as selection of hardware vendors and evaluation of potential software projects

Dell’s $8.4 billion of net cash (cash minus debt), constitutes nearly 30% of the $14.34 per share Trefis price for Dell’s stock. The company is spending a chunk of that net cash to build a larger IT services business.

Pre-acquisition, Dell’s existing IT services business known as Managed Services & Consulting, constitutes 21% of the Trefis price estimate, and is worth about $5.8 billion. It is the most valuable business division of Dell, more valuable than its traditional consumer PC business.  Post-acquisition, with approximately $3.9 billion of value coming from Perot Systems, nearly 35% of Dell’s stock value will be attributable to its combined IT services businesses.  In comparison, only 20% of Dell’s stock value comes from the Notebook PC business and 3% from the Desktop PC business.

The IT services business is a larger driver of Dell’s value due to the higher margins in the Services business compared to margins on Dell’s hardware business (notebooks, desktops, servers, printers, etc.).  We estimate that Dell’s Services EBITDA margin is approximately 9% today compared to EBITDA margins of 4.6% and 3% for Dell’s Notebook and Desktop businesses respectively.  Perot Systems, which had overall EBITDA margins of 10.7% in 2008, will help enhance Dell’s overall margins by shifting more of the business mix to higher margin services.

We have not yet updated the Trefis analysis to reflect the combination of Dell and Perot Systems but plan to do so in the near future.  Within Dell’s content on our platform you can see how much the stock is impacted by fluctuations in Services EBITDA margin.