01:17 AM

Analysis: Dell Acquires Perot Systems - What WIll Cisco Do?

Dell announced on Monday that it would acquire the information technology provider Perot Systems for $3.9 billion as it seeks to expand beyond its core personal computer business.
Michael Dell, the company's founder and chief executive, has spent much of the recession talking about directing his company's cash stockpile toward acquisitions, particularly in the services arena. By agreeing to buy Perot Systems, for $30 a share in cash, Dell has made just such a purchase. But even with the acquisition, Dell's services arm would remain far smaller those of rivals Hewlett-Packard and I.B.M.
Dell Expands Services in $3.9 Billion Perot Deal - NYTimes.com

Foremski's Take: Dell's acquisition of an IT services company was inevitable. The company's bid to expand into data center markets, and the increased commoditization of hardware, has left it no choice.

IBM realized many years ago that to succeed it needed a strong IT services group. Hewlett-Packard knows this too, and acquired EDS in May 2008 for $13.9 billion.

Dell's challenge will be to quickly integrate Perot Systems and to educate Perot's salesforce to help sell Dell products -- these are not easy tasks.

The Dell deal focuses attention on Cisco Systems which is expanding beyond network equipment and into data center markets of servers and storage. Cisco may seek to bolster its IT services group through acquisitions.

IT services, however, are a lower profit margin business compared with Cisco's core businesses. Acquisition of IT services groups could dilute its profit margins and affect its Wall Street valuation.

But with major IT services companies now controlled by rivals, Cisco may have little choice in pursuing a similar strategy.

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