Dell Looks to M&A to Bolster Its Services Business in China

Dell Computer
Dell Computer

Dell is on the prowl for companies that can expand its services business, especially those that can give it a leg up in China. And although Dell (DELL) is late to the game in the lucrative services business compared to IBM (IBM) and HP (HPQ), analysts say it has a shot at reaching its lofty goals.

Steve Schuckenbrock, the Texas-based computermaker's global president for its large enterprise business, laid out that acquisition strategy at a press conference today, according to a Reuters report. And Dell's goal is indeed lofty goal. Over the next three years, it's aiming to increase services in China to 25% of total revenues coming from that country, up from the current 10%, the report noted.

"That Dell executive made a pretty bold statement. But Dell is also coming from a much smaller base than the other big guys, so I think they'll be able to do it," says Brian Marshall, an analyst with Gleacher & Co.

Dell's Perot Deal Started the Change

For Dell, services are expected to be a key source of revenue and profit in coming years as computers become further commoditized and marginalized, analysts say. Dell's rivals came to that realization early on. In 2009, services accounted for 11% of Dell's total revenues, but that segment represented a hefty 57% for IBM and a 30% for HP, Marshall notes.

Only last year did Dell make a serious push into services with its $3.9 billion acquisition of Perot Systems. Prior to that, Dell's $5.1 billion services business largely centered on support, maintenance and info-tech consulting closely tied to the sale of its computers, says Andy Hargreaves, a Pacific Crest Securities analyst.

But the Perot deal pushed the newly created Dell Services into IT services that focused on sales based on industries, such as health care and government, and dishing up soup-to-nuts technology like consulting, applications development and management and IT infrastructure outsourcing with aim of addressing customers' needs beyond just the computers.

Plenty of Potential Targets in China

"Since the Perot acquisition last year, nothing has happened that would blow anyone away, but it's only been a year," Hargreaves says. "It was a big acquisition, and it takes time for Dell to learn a new business and integrate the companies. It may be another two to three years before we see something."

But in a one-year anniversary blog post on Nov. 3, Dell's Robert Williams notes that since acquiring Perot, Dell Services generated $1.9 billion in revenues during the fiscal second quarter, with 70% coming from recurring-revenue sources, and that it landed a five-year deal with BNSF Railway to provide such things as managed-print services and fully integrated service-desk support.

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As Dell looks to increase its China services business via acquisitions, analysts note there's no shortage of companies to chose from. "The IT service space is extremely fragmented, so I'm sure there are a lot of smaller players Dell can go after," Marshall says. "But the big one is Digital China. . .more or less the IBM of China from an IT services standpoint."

But given that Digital China's market capitalization is roughly $16 billion, any such deal would seem tough for Dell, whose market cap is approximately $28.2 billion, to swallow. Marshall notes it's unlikely that Dell would entertain such a deal.

Still, Marshall agrees with Dell's decision to ramp up its China business, adding: "I think it makes sense to focus on areas of fast growth."

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