Dell (DELL) Overpays For Perot Systems (PER)

Shares of Perot Systems (PER) are up 65% to $29.69 on news that the company will be bought for $3.9 billion. Perot’s 52-week high.

Dell is substantially overpaying to get into the technology and IT infrastructure business, industries where it is far behind rivals including IBM (IBM) and HP (HPQ). Dell may believe that it has no choice other than to pay a financial premium that it cannot defend on an ROI basis because of a strategic need that it cannot fulfill within its current operation. Dell has been criticized on Wall St. for relying too much on PC and server sales, where margins have come under more and more pressure.

Dell will pay Perot shareholders will pay cash for a company that made only $31 million last quarter on $628 million in revenue. That revenue was down from $705 million in the same period the year before. Net profit for that period was $30 million. In other words, Perot is shrinking.

Perot’s two major lines of business did particularly poorly in the quarter ending in June. Revenue from its healthcare business fell 8% to $302 million. Revenue from its commercial segment was down 21% to $173 million. The results also show how heavily Perot relies on one industry. Healthcare sales are almost half of the company’s total.

Perot also has a very modest balance sheet $260 million in cash and equivalents and $316 million in long term liabilities.

Dell investors should be outraged at paying such a large sum for such a small, vertical operation.

Douglas A. McIntyre