by Stephanie Overby

Dell-Perot Deal Spells Trouble for Tier-Two Outsourcers

Sep 22, 2009
Data CenterMergers and AcquisitionsOutsourcing

By combining Dell's global hardware manufacturing and sales business with Perot Systems' IT services offerings, the Dell-Perot deal puts the two companies in a better position to compete with IBM and HP and to leap ahead of tier-two outsourcing providers. It also demonstrates the importance of integrating hardware sales and services delivery for outsourcing vendors and their customers.

The consolidating IT services market contracted a bit further on Monday with Dell’s announcement that it will acquire Perot Systems for $3.9 billion.

The Texas twosome can hardly match the scale of HP or IBM on the outsourcing front—Perot brings just $2.7 billion in services revenue to the table—but the matchup is clearly made in their image. The fact that Dell paid nearly a 70 percent premium on Perot’s stock price to seal the deal confirms “the value of integrating hardware and services for infrastructure management is clearly gaining momentum,” says Peter Bendor-Samuel, CEO of outsourcing consultancy Everest Group, which counts both Perot and Dell among its clients. It also suggests, he adds, that the size of outsourcing/hardware companies will continue to increase in importance.

While Perot operates in some high-interest industries—most notably healthcare and government services—its footprint remains relatively small. But Dell, struggling as a hardware manufacturer at a time when infrastructure sales are slow, wants in on the outsourcing business, even if it takes several acquisitions to do it. “Perot’s capabilities are focused on a few geographies and industries, which Dell will need to grow or complement with other acquisitions to attain greater scale to compete head-on with the likes of HP and IBM,” says Bendor-Samuel.

[ Related: Dell Perot Deal: Big Price Tag, Small Industry Impact and FAQ: What the Dell-Perot Merger Means for the IT Industry. ]

Neither company is likely to be too worried about the competition at this point. It’s more likely that Dell-Perot will make inroads on smaller deals. “Dell and Perot Systems can exert pressure in this sector, and if played right, could see their market share increase in the midmarket in both products and services,” says Stan Lepeak, managing director at outsourcing consultancy EquaTerra.

As such, it’s the tier-two players that will be watching the Dell-Perot deal closely. India-based providers who’ve been attempting to ramp up their infrastructure offerings “must continue to find ways to grow and reach meaningful scale,” says Bendor-Samuel. Meanwhile, traditional IT services players who’ve yet to walk down the aisle with a hardware vendor—such as ACS, CSC and Atos Origin*—may be wondering how wise it was to stay single. “They will be asking themselves how they can grow in the infrastructure space to meet the increased threat posed by the integrated hardware and services offerings of IBM, HP, and now Dell,” Bendor-Samuel says.

As for integration issues, Dell and Perot may have an easier go of it than most. “Good cultural alignment, close physical proximity for key leaders, and the absence of an entrenched services business at Dell—together with the obvious convergence around the value of Perot as a hardware channel for Dell and Dell as a lead generator for Perot—should make integration much faster and less painful than is the norm for deals of this scale,” says Mark Robinson, EquaTerra’s chief operating officer.

While Dell may be eager to keep Perot clients—and their relatively healthy profit margins—existing customers should proceed with caution (See Five Steps to Take if Your Outsourcer is Sold.) Specifically, clients should assess any impact the deal has on non-Dell hardware options, Lepeak advises.

Those most worried about the Perot deal are Dell customers working with other outsourcers. “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,” says Lepeak.

*Editor’s Note: In an earlier version of this story, Unisys was grouped with ACS and CSC as an example of a traditional IT services provider. In fact, Unisys sells enterprise servers. We replaced Unisys with Atos Origin.