Dell-Perot Deal: Big Price Tag, Small Industry Impact

Dell's $3.9 billion bid for Perot Systems could strengthen the hardware maker's services arm, but competitors Accenture, CSC, HP-EDS and IBM won’t see the deal as a business threat.

Dell’s bid for outsourcer Perot Systems marks a significant move for the hardware vendor, but industry watchers say the pending acquisition won’t do much to alter the current IT services market.

[ Related: Dell buying Perot Systems for $3.9 billion and FAQ: What the Dell-Perot Merger Means for the IT Industry ]

Dell Monday announced it would pay $3.9 billion to acquire existing partner and IT services provider Perot Systems. The deal marks a very deliberate strategy from Dell to add IT services expertise to its mostly products business, industry watchers say.

“Dell has been a bit more gradual embarking on its services strategy, but it has been very deliberate in determining who is the right player at the right time,” says Dane Anderson, research vice president at Gartner. “Perot offers something that can be complementary to the Dell business and at the same time, it is very digestible and integrate-able.”

Slideshow: Recapping the hottest tech M&A deals of 2009

Perot, which is already a Dell partner and delivered a healthcare solution based on a Dell platform earlier this year, does business just shy of $3 billion, according to Anderson. A deal would enable Dell to sell products into Perot accounts and vice versa. If the two companies can stay focused, analysts say, the opportunity for a successful integration is large.

For one, Dell needs to maintain its foothold in the small and midsize enterprise market and not yet attempt to become an “anywhere, anytime global services provider,” Anderson says. “This deal increases Dell’s footprint, but it doesn’t give them a license to play anywhere. They have to be selective and disciplined about the markets the combined company addresses.”

That means Dell could excel in vertical markets such as healthcare and government, considering Perot’s strong history in both areas. Industry watchers say with proper execution the acquisition could be the beginning of Dell expanding beyond being a product maker to becoming a provider of IT services, which would benefit both companies involved in the pending deal.

[ Related: With Perot, Dell Can Get a Chunk of IT's Hottest Market - Health Care ]

“Perot Systems is a conglomerate of goods and services outside the scope of IT. This acquisition is a first step in Dell’s long-held desire to provide more than just desktop solutions,” says Steve Brasen, principal analyst with Enterprise Management Associates. “Leveraging Perot’s broad market base, however, Dell will likely find direct marketing opportunities to expand its core IT business – particularly among government, financial and healthcare institutions.”

Dell is planning to keep the leadership team at Perot in place, which could bode well for the success of the acquisition, says Mark Mayo, partner and president of global resources management at TPI. But aside from the deal representing a trend toward consolidation in the IT services market, Mayo doesn’t see the final acquisition as having a big impact on the competition or the market in general.

“We expect to see more consolidation because it is a very competitive market and a surge of new players came into the market globally in the late 1990s and early 2000s,” Mayo explains. “But this is not an industry-leading or industry-making event. The acquisition will impact Dell and Perot and their customers, and it is interesting, but it’s not game-changing for the industry.”

Others say the deal represents an aggressive move on Dell’s part that impacts both the hardware and IT services market, and vendors such as HP and IBM specifically. 

HP and IBM have long been able to couple their product offerings with professional services, and HP recently upped the ante by acquiring EDS. Dell being a pure-play hardware vendor with partnerships in software and services wasn’t able to effectively compete with the market-leading services vendors. Now with Perot's services business, Dell is on track to better compete with the likes of Accenture, CSC, HP and IBM, analysts say.

“Perot and Dell together are able to compete with HP and IBM, specifically, in ways that neither was able to before. HP and IBM (and to a lesser extent Sun) have been able to offer a complete data center infrastructure -- from facilities, through server and storage hardware, to software, and implementation and operational services – for some time. Dell was on a losing path as a pure-play hardware vendor,” says Andi Mann, vice president of research at Enterprise Management Associates.

Acquiring an IT services arm will help Dell better compete and expand into new markets, but it won’t be enough to enable it to fully compete head-on with the likes of HP and IBM, Mann adds.

“If Dell really wants to compete on even footing with HP and IBM, it is going to need a software stack of its own. It can continue to cede solution revenues to its partners for some time, and this buy will cause significant indigestion and inertia that will hold up any new acquisition, but eventually Dell must pick up a software stack,” Mann says.

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This story, "Dell-Perot Deal: Big Price Tag, Small Industry Impact" was originally published by Network World.

Copyright © 2009 IDG Communications, Inc.

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