Dell Steps Slowly Into More Services (DELL, HPQ, IBM, PER)

Dell Inc. (NASDAQ: DELL) has been branching out further into IT and web-based services in an effort to supplement and to get away from a model that is almost solely-dependent upon PC sales and peripheral sales.  It has not taken as aggressive of a path as Hewlett-Packard Company (NYSE: HPQ) via the EDS purchase, and neither company anywhere as dedicated as International Business Machines Corp. (NYSE: IBM) in services.  But by the looks of things the company has started to migrate into this direction.  While we feel the answer to this is “It’s about time!” there is actually an answer as to why this migration has been slower and strategic rather than swift and broad.

About a week ago, Dell and Perot Systems Corp. (NYSE: PER) announced a strategic alliance to provide fully-integrated virtualized healthcare technology solutions which are aimed to cut down on costs and to improve patient care.  In January, Dell acquired Microsoft IT consulting and solutions segments of Allin Corporation for $12 million in a stock purchase agreement. These are not the only services-oriented launches that the company has launched, but these are arenas which we would expect the company to grow deeper and further into.   Then today came an announcement that the company was unveiling a nationwide managed services dolution for small and mid-sized businesses.  All of these are baby steps, but in today’s climate that might have to be about as good as it gets.

We have frankly been expecting Dell to make a transformative acquisition into IT-services and consulting for months now.  We think there are two major reasons the company has not gone this route.  Michael Dell stepped back in and has been trying to turn this ship around at a time when the economics and tech trends have gone against his efforts.  We cannot blame a recession nor an industry migration to sub-$1,000 and even sub-$500 computing on the company.  But the company’s share price did not hold up at the same time the company was throwing money away in stock buybacks.  This in turn took away its currency to make any strategic and game-changing acquisitions such as when H-P acquired EDS.

The good news is that Dell’s stock is back above $10.00 and its market cap is back above $20 billion.  The bad news is that it lost almost two-thirds of its value from shortly after the return of Michael Dell.  So it has been unable to do any sort of acquisition which could have rivaled that H-P and EDS transaction.  EDS was a doubling effort by H-P and it was essentially a $13.9 billion acquisition.

Dell does over $10 billion in liquidity and has thge ability to raise cash if needed.  The company also recently sold $500 million in debt.  As of March 14, 2009, Dell had 1,951,045,734 shares outstanding.  Its 2009 annual report noted that the company is authorized to issue up to 7 billion shares of common stock.  It can also issue 5 million preferred shares, but no shares were listed as being issued or outstanding.

Dell can do a deal if it wants to.  The question is if it is willing to risk the dilution or the hit to the stock with shares this low.  It’s $20+ billion market cap also makes it difficult for the company to take a huge company over.  Besides this being a branching out and diversification play, having IT-consultants and services allows more chances for on-the-spot sale of PC’s and other equipment.

JON C. OGG