Tuesday, September 22, 2009

About Dell's Purchase of Perot Systems

Yesterday morning's big corporate news was Michael Dell's computer making company buying Perot Systems. For a hefty $30/share, a hefty premium to the $17 or so Perot closed at on Friday. A price the consultant/system integrator hasn't seen in ten years!

I'm sure Dell shareholders are thanking Michael profusely for squandering their money so unwisely.

I happened to have lunch with my friend and former/sometimes business partner, B. He noted that all of Ross Perot's companies had now been purchased, i.e., EDS by HP, and Perot Systems by Dell.

I added that a third, GM, was now owned by the US government. We both laughed. For those too young to recall, GM once purchased EDS, making Ross Perot the largest single shareholder, and a gigantic thorn in the side of then-CEO Roger Smith. Eventually, they paid Ross to go away. And spun off EDS, as well.

But, back to Dell.

The nearby 5-year price chart for Dell, Perot Systems and the S&P500 Index clearly displays the folly of Michael Dell's move. For the past five years, Dell has been on a long, slow decline. My many posts discussing the firm's fall from its prime, and Michael Dell's inability to recover its lost ability to generate consistently superior total returns, provide background on this.

With a loss of 50% of its value over the past half-decade, Dell is headed toward the graveyard of Schumpeterian dynamics. There's just not that much juice left in manufacturing, selling and distributing computers the Dell way.

Compared to Dell, Perot Systems have performed spectacularly well. It's managed to remain even, and even slightly outperform the S&P over the whole period, though not consistently.

For Dell to buy Perot is essentially a bid to diversify into a different business, using spare cash. It's a classic example of the financial theory argument that investors can more cheaply diversify for themselves. At a premium exceeding 50%, that's certainly true in this case!

In fact, the nearly $4B acquisition begs the question of what Dell is doing with some $10B in liquid assets on its balance sheet while its value decays?

The Wall Street Journal opinion piece lauded Dell for diversifying. Personally, I don't see it that way. Instead, Michael Dell, like so many other CEOs, can't let go. He should just sell or merge Dell to create a larger PC manufacturer. Let his shareholders buy a pure systems integrator play, or HP, if that's what they desire.

Michael Dell is using his shareholder's money to continue having a company to run. How he is going to make Perot something it can't be on its own should worry Dell shareholders. Perot could have borrowed money, were its business opportunities sufficiently attractive. If Michael Dell better knows how to run a systems integrator than do the senior management of Perot Systems, Dell could have grown its own unit, for much less money.

Finally, as usually occurs in these situations, Dell seems to be buying the weakest of the breed of remaining systems integrators. The better ones, such as EDS, were already picked off.

There's nothing about this deal that makes sense, except prolonging Michael Dell's personal joyride running a Fortune 500 company.

Much as I suggested for Kodak's shareholders, Dell's should be bringing a lawsuit over this egregious use of their money. Or, better yet, just sell Dell immediately and take the recent loss as a lesson in being more judicious investors when the company is run by the guy it's named for, but the firm is over the hill.

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