Technology > Tech Biz
Dude, let's (not) make a deal
Dell will probably sit out the tech merger craze. But that's a good thing for its shareholders.
July 17, 2003: 5:53 PM EDT
By Paul R. La Monica, CNN/Money Senior Writer

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NEW YORK (CNN/Money) - The consolidation craze in tech is just beginning.

There is excess capacity throughout the sector and that's led to a number of notable deals recently, like EMC agreeing to buy Legato Systems and Yahoo! scooping up Overture Services. Of course, there's also the Oracle-PeopleSoft-J.D. Edwards merger melodrama.

The big will get bigger. Armed with gobs of cash and improving stock prices, companies like Microsoft, Cisco Systems, IBM and Hewlett-Packard are probably already scouring the tech landscape for companies to pick off.

But what about Dell Computer? Friday, shareholders are due to vote on changing the company's name to just Dell Inc. at the annual shareholder meeting to reflect the company's broadening product line. But will CEO Michael Dell announce that the personal computer maker is joining the merger fray?

Don't bet on it. And that's probably for the best.

No need for investment bankers

A spokesman for Dell said that the company is not likely to make a big splashy acquisition any time soon.

Dell's name has been bandied about in several merger rumors in recent years. There has been idle chit-chat about Dell buying foundering PC rival Gateway, handheld device maker Research in Motion, the printer maker Lexmark, storage kingpin EMC, and most recently, the struggling server company Sun Microsystems.

But during a speech in Los Angeles two years ago, Dell, who founded the company while he was still in college, gave a pretty succinct reason why he prefers organic growth to mergers.

"You get a lot of bad stuff when you acquire other companies, and I'm not sure we need it," he said at the time. "The best approach for us is to acquire our competitors' customers one at a time."

Dell has done only two deals in its history. And one of them was an unmitigated disaster. In 1999, Dell bought ConvergeNet, a closely held storage company, for more than $300 million, in a bid to boost its presence in the storage hardware market.

By 2001, it was obvious that the deal wasn't working out. Dell shut down ConvergeNet that year and took a $75 million charge in fiscal 2002 to write off goodwill and intellectual property related to the acquisition. Dell's other purchase was the acquisition of private services and consulting firm Plural last year.

Why buy?

Considering that Dell has gone from an upstart to the world's largest PC maker without acquisitions, it's hard to imagine why the company would want to risk ruining its momentum by buying a rival that isn't as efficient as it is.

"Typically a company will look at acquisition strategies when their growth starts to slow but there's no slowing down at Dell," said Brent Bracelin, an analyst with Pacific Crest Securities. He doesn't own the stock and his firm has no banking relationship with Dell.

More about tech mergers
Yahoo! to buy Overture
Is HP going shopping?
Software shakeout

To that end, Dell continues to gain PC market share and has once again vaulted ahead of HP for the global market lead, according to second quarter figures released by IDC Wednesday. Dell has 17.8 percent of the PC market worldwide, up from 14.9 percent a year ago. HP has 16.2 percent. And of course, HP is as big as it is by virtue of its merger with Compaq.

What's more, Dell has found that it is easier to simply partner with other leading tech companies instead of flat-out buying them.

After the ConvergeNet debacle, Dell entered into an agreement with EMC and now resells EMC storage systems. Dell has done the same thing in printers, inking an agreement with Lexmark. As for handhelds, Dell decided to enter the market late last year and within a few months has already found itself in the top five of handheld market share.

The strategy seems to be working. Even though Dell has maintained for the past year or so that is not seeing a pickup in tech spending, it has continued to post solid revenue gains. In its fiscal first quarter, which ended in April, sales jumped 18 percent from a year earlier. For the second quarter, analysts are predicting a 15 percent increase in revenue.

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Dell's stock hit a 52-week high Wednesday and now trades at about 34 times earnings estimates for the current fiscal year, which ends in January. While that's pricier than rivals HP (HPQ: Research, Estimates) and IBM (IBM: Research, Estimates), one fund manager says the valuation is warranted as long as Dell sticks to its strategy of staying away from mergers.

"Dell carries a premium multiple and all it would take for the company to lose it is if it slipped up once. I'd revisit my reasons for owning Dell if it did a major acquisition," said Ted Parrish, co-manager of the Henssler Equity fund.

In other words, to paraphrase Billy Joel, it seems like Wall Street loves Dell just the way it is.

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