Acquisition gives Dell entre into more profitable federal IT services market

Dell's acquisition of Perot Systems, announced on Monday, should position the company to become a larger player in the federal technology consulting and services market, and marks a continuing trend of hardware manufacturers acquiring IT consulting firms to weather a shrinking computer market, according to industry observers.

The computer manufacturer will pay $3.9 billion in cash to buy Perot Systems, a technology consulting firm based in Plano, Texas, that was founded by former presidential candidate H. Ross Perot. The company is recognized as a leader in electronic medical records, a growing industry that received $19 billion in stimulus grants to increase the adoption the e-records. By acquiring Perot, Dell plans to become a larger player in the health IT marketplace.

"Perot has got a strong health care business already," said Dell spokesman David Frink. "If you look at recent announcements, [Perot] is one of the leaders in helping large health care customers implement electronic health records. Clearly this is an important sector for Dell. It's something that obviously Perot is strong in and indicates the kind of synergy we think the combination will produce."

Dell's business has been slowed by the economic downturn, shrinking the profit margin on computer hardware such as PCs. The company follows other computer hardware manufacturers such as Hewlett-Packard and IBM, which have purchased consulting firms EDS and PriceWaterhouseCoopers, respectively.

The company's move into the services sector was expected, according to Stan Soloway, president of the Professional Services Council. "It's an interesting merger. People have been wondering for some time if Dell was going to move into the services space," he said. "It's not a shock. They're the last of the big independents that didn't have a services beach head."

But Perot also faces difficulties. The firm lost its biggest client, Swiss bank UBS, in 2007 and has seen its government business drop between 5 percent and 8 percent during the past two years. A source familiar with the federal IT market said Perot Systems became complacent and lost several contracts after they came up for recompetition.

"Being in the hardware world is a real challenge. Margin pressures have made it difficult," said Ray Bjorklund, chief knowledge officer for FedSources, a consulting firm based in McLean, Va. "By adding a pure-play services company like Perot, now [Dell] has higher margin offerings they can take advantage of."

Perot's existing business in the government sector also will give Dell additional exposure and access to new customers, making the company a more viable competitor for federal contracts, he said.

"Perot's domain expertise in health care technology becomes an interesting play," Bjorklund noted. "Dell could conceivably become an even bigger player."

Soloway said Perot's strong foothold in the Defense Department will help Dell as well. "It makes sense on a number of levels," he said. "I assume [the merger] is part of Dell's plan to expand its footprint" in the federal services market.

Perot will keep its name and headquarters, which will serve as the home of Dell's services division. Perot Chief Executive Officer Peter Altabef will head the division.