Unheralded M&A Moving Dell Beyond Dying PC Market


The death of the personal-computer market won’t kill Dell, thanks to the company’s recent merger and acquisition strategy.

A string of unheralded 2012 acquisitions — to go with three years of M&A in software and data security markets — is helping Dell distance itself from peers and from its bread-and-butter PC business, positioning the company for improving operating margins and earnings per share. That comes as analysts expect long-term profitability declines in its core PC business.

Wall Street increasingly likes what it sees in the Dell M&A strategy.

On Monday, Morgan Stanley analyst Katy Huberty upgraded Dell’s shares to “equal weight” from “underweight,” on expectations that the company’s recent acquisitions will help it generate earnings that are in line with the tech sector, rather than underperforming peer PC makers like Hewlett-Packard. Now Dell can be expected to show similar performance to tech giants like International Business Machines, EMC, NetApp, and Seagate Technologies.


In the past six months, Dell’s shares have gained just over 1 percent to $16.38, a stronger return than Hewlett Packard, which has experienced a near-10 percent drop. Tech companies geared to networking, data security and virtualization, like IBM, EMC and Seagate Technologies, have posted double digit stock gains.

“[Our] more positive view is a function of both potential EPS upside and the recent acceleration in acquisitions which show the company is taking action to address its past market underperformance and high exposure to secular pressures in the consumer/PC business,” wrote Huberty in a note to clients.

Through acquisitions over the last three years, Dell has added $4 billion in revenue from higher margin and faster growing businesses outside of the company’s PC and server operations, which still account for roughly two-thirds of overall sales. In 2012, Dell’s M&A pace has quickened, with the company adding $600 million in new non-PC sales in a flurry of deals. “Over the next several years, these acquisitions could drive Dell toward our bull case 9 percent-plus operating margin and $2.70 EPS,” says Huberty.

While Dell has been reluctant to disclose the price of recent acquisitions — data protection specialist SonicWall, virtualization software maker Wyse Technology, and AppAssure Software, a maker of backup protection software for cloud infrastructure — the deals push Dell into markets that are expected to yield higher growth and profit margins than PCs and servers. In the U.S., PC sales fell nearly 5 percent in 2011, according to research firm IDC. Meanwhile Dell, the world’s third largest PC maker, expects its computer sales to fall 7 percent in the first quarter.

Acquisitions give Dell the potential to improve gross margins by over 20 percent and operating margins by 9 percent, even if PC margins fall as much as 5 percent annually over the next few years, adds Huberty. While storage, networking and services businesses will be the drivers, Dell will still be challenged to grow its overall revenue, which grew less than 1 percent to $62 billion in 2011.

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