Dell Pays 68% Premium for Perot’s Health Technology (Update3)

Sept. 22 (Bloomberg) -- Dell Inc.’s proposed $3.9 billion buyout of Perot Systems Corp. reflects the second-largest personal-computer maker’s ambitions in the market for health- care information technology.

Dell offered $30 a share in cash yesterday for Perot, 31 times its earnings in 2009, according to Ben Reitzes of Barclays Capital in New York. Hewlett-Packard Co. bought Dallas-based EDS last year for $13.2 billion, 14 times that company’s 2008 earnings, Reitzes said.

“The Perot deal offers them plenty of opportunities in the health-care and federal space,” said Paul Roehrig, an analyst at Cambridge, Massachusetts-based Forrester Research Inc. “Dell can build a leaner, commodity-based services offering to be an interesting competitor.”

With Perot, founded by former U.S. presidential candidate H. Ross Perot, Dell gains a partner to boost sales of computer services as consumers and companies trim PC purchases to cope with the economic slump. Larger services units helped International Business Machines Corp. and Hewlett-Packard withstand the recession better than Dell, whose sales slumped 22 percent last quarter.

Perot, whose customers include the Centers for Disease Control and Prevention, gets about half of its sales from hospitals, physicians’ practices and health-insurance companies. President Barack Obama’s plan to expand health-care insurance coverage to virtually all Americans, if passed by Congress, could boost Perot’s health care-related business.

Electronic Health Records

Tighter budgets for hospitals and a shift to electronic health records also will bolster Perot’s sales, according to Reik Read, an analyst at Robert W. Baird & Co. in Milwaukee. The U.S. economic stimulus bill included $20 billion to upgrade health-care information technology, Read said in a report.

Dell’s services business will generate annual sales of about $8 billion and the deal will probably boost profit in fiscal 2012, Round Rock, Texas-based Dell said yesterday. Hewlett-Packard’s services revenue was $22.4 billion in 2008, and IBM’s was $58.9 billion.

“It doesn’t necessarily make them a contender to IBM and HP,” said Dane Anderson, an analyst at Stamford, Connecticut- based Gartner Inc. “It’s digestible from a size perspective and brings them to a level where they can compete.”

“We’ve had services capability and we’ve been trying to grow that organically,” Paul Prince, chief technology officer for Dell’s enterprise group, said yesterday in an interview. “It’s pretty clear that we felt like customers were looking for a bigger picture, bigger solution at a faster pace than we could have done just by growing it organically.”

Services Strategy

EDS, the world’s second-largest computer-services provider after IBM, helped Hewlett-Packard increase its services revenue 93 percent last quarter as sales at the PC division fell 18 percent. Perot also was the founder of EDS, established in 1962.

“The economy is forcing a lot of companies to rethink their services strategy,” said Alexander Motsenigos, director of global services markets and trends for Framingham, Massachusetts-based IDC. The researcher estimates the 2008 global services market at $806 billion. “Whether it’s going to be successful is a different question.”

IDC forecasts that information-technology spending by the health-care industry, including outlays for services and equipment, will total $22.3 billion this year.

Perot shares, which jumped 65 percent yesterday, were unchanged at $29.56 at 4:04 p.m. in New York Stock Exchange composite trading. Dell, which ranks second to Hewlett-Packard in PC sales, fell 28 cents to $15.73 on the Nasdaq Stock Market.

Dell already has worked with Perot in the services market for the past two years, the companies said. Once the acquisition is complete, Plano, Texas-based Perot will become Dell’s services unit, headed by Perot’s current CEO, Peter Altabef.

Perot Contracts

Perot manages customers’ computer systems, data centers, software and Web sites through multiyear contracts, generating sales of $2.78 billion last year. Second-quarter net income rose 3 percent even as revenue slipped 11 percent.

The company’s revenue was forecast to decline 9 percent this year, according to the average estimate of analysts in a Bloomberg survey. Dell’s revenue will drop 16 percent, analysts project.

Michael Dell, 44, called the purchase a “profound” move. “This isn’t a services acquisition. It’s the right services company for us,” he said yesterday in an audio message to both companies’ employees that was included in a regulatory filing. The deal “illustrates pretty clearly how we’re remaking Dell around a clear vision, on our terms.”

Cost Cutting

Dell, which lost the PC market lead to Hewlett-Packard three years ago, has relied on cost reductions including job cuts to help prop up profit amid the recession. The company, aiming to save $4 billion a year, already has farmed out 40 percent of manufacturing and said it expects to contract out even more. Still, net income dropped 23 percent last quarter.

While Michael Dell has predicted a new version of Microsoft Corp.’s Windows operating system for PCs, due next month, should help boost PCs sales, he also said the company doesn’t expect to see a huge uptick in PC upgrades until 2010.

Perot’s Chairman, Ross Perot Jr., may join Dell’s board of directors. Goldman Sachs Group Inc. advised Perot on the transaction, and Morgan Stanley advised Dell. Perot agreed to pay a termination fee of $130 million to Dell if it breaches the agreement.

Perot is unlikely to get another bid, given that Dell has an established relationship with the company, the offer is all cash and Dell is paying a “significant valuation premium,” Baird’s Read said.

Investors say they aren’t concerned that Dell may have to hold off on other purchases, at least for a while.

“They have enough on their plate,” said Kimberly Caughey, investment analyst at Fort Pitt Capital Group Inc. in Pittsburgh, which owns about 230,000 Dell shares. “They need to look at their portfolio and see how they are going to market themselves.”

To contact the reporters on the story: Connie Guglielmo in San Francisco at cguglielmo1@bloomberg.net; Katie Hoffmann in New York at khoffmann4@bloomberg.net

To contact the editors responsible for this story: Jonathan Thaw at jthaw@bloomberg.net; Julie Alnwick at jalnwick@bloomberg.net