"That Giant Sucking Sound"

Dell Computer is purchasing Perot Systems for a whopping $3.9 billion, a 68% premium over the pre-announcement share price. I'm glad that Michael Dell finally realized that hardware has been a commodity for some time now, unless you're Apple, which has created a unique experience with the combination of their hardware and software. If Dell had been paying attention, when Google started making their own servers (over 200,000 of them) of a proprietary design in order to reduce costs, the writing was on the wall. Years ago, IBM moved away from focusing on hardware and successfully transitioned itself to a global services company. Hewlett-Packard, with the exception of Carly Fiorina's ill-fated acquisition of Compaq, had been moving toward services. But then, Fiorina only made that acquisition to justify an increase in her compensation package - thankfully, her presence is no longer a blight on Silicon Valley. So Dell waited far too long, but did they pay too much for Perot Systems?



Consulting last year's 10-K report, it is apparent that $3.9 billion is quite a bit of money, considering the revenue and cash flow. Revenues top out at $2.7 billion, but at the bottom line, net profits are a mere $117 million. This is largely due to the fact that services incur heavy expenses and don't have software-like margins, such that operating costs for Perot Systems are a hefty $2.3 billion. On top of that, revenues are down in 2009, making this acquisition look even worse. But this is only a part of the picture, because Perot has very little long-term debt and it receives 47% of its revenue from the health care sector.

The American Recovery and Reinvestment Act of 2009 has set aside $59 billion toward health care and $19 billion just to create electronic medical records systems in hospitals and clinics across the country. Currently, less than 10% of doctors have access to electronic medical records, and that is about to change. Perot Systems is well positioned to capitalize on this tax-payer funded opportunity, so I think that 3 years from now, Dell will appear to be astute in paying such an egregious sum for a company founded by someone who, during his presidential campaign, talked about "crazy Aunt Hattie in the basement" as a reference to the economy, and "that giant sucking sound will be jobs going to Mexico" as his rebuttal to NAFTA.