By Charles King, Pund-IT, Inc. March 30, 2016
The pending acquisition of Dell Services by NTT DATA didn’t include many surprises. The agreement has been hinted at since mid-February, since negotiations for other potential deals (reportedly with Atos and Cognizant) were said to have floundered. The reported $3.055B final sale price is lower than both the $3.5B analysts initially claimed Dell was asking for its services assets and the $3.9B that the company originally paid for Perot Systems, the deal that sparked its larger services push.
So it’s worth asking what that lower price means in the larger scheme of things. First and foremost, professional IT services and the market for those offerings has changed significantly over the past half-decade, affecting the valuation of related businesses. Dell has also made changes to its Services organization, including investing in modernization initiatives and divesting some pieces, such as its eServ Product & Process Innovation Services for engineering.
Finally, Dell will retain its Global Support and Deployment organization which provides services for its client and enterprise hardware businesses. These are all factors that NTT DATA considered in determining that Dell Services was a productive, differentiated and profitable organization that would be a good fit for its own business and strategic plans.
Dell + Perot vs. HP + EDS
It’s also worth remembering that prior to buying Perot Systems in late 2009, Dell’s services were largely limited to PC deployment and maintenance agreements with private and public sector organizations. The deal occurred about a year and a half after Michael Dell returned to the company’s CEO position, and qualified as solid evidence that Dell was serious about remaking the company into an end-to-end systems vendor.
The acquisition was also compared by some analysts, rightly or wrongly, to HP’s purchase of EDS for a staggering $13.9B in May 2008. At one level, there are similarities with both Dell and HP investing substantial sums to gain immediate access to services market opportunities. But some suggested that Dell got the short end of the stick by buying what was essentially an old school IT services player with limited opportunities for client or revenue growth. However, over the following four years, things worked out very differently for Dell and HP.
In the former case, Perot Systems provided Dell immediate entry to profitable relationships and transactions with mid-sized healthcare providers, financial services and insurance companies and local/regional governments that fit well within Dell’s evolving midmarket strategy. The deal also allowed Dell to branch out into new areas and offerings, such as cloud-based storage services for medical images. Over time, Dell Services became a steadily profitable business that complemented the company’s end-to-end solutions vendor transformation.
In contrast, HP’s purchase of EDS was a painful dud. Nearly from the beginning, HP’s subjected EDS to significant headcount reductions, sparking a general run for the exits. Plus, since the deal was consummated as the global economy was falling off a cliff, there were far fewer opportunities for new business than then-CEO Mark Hurd and his lieutenants assumed. By the time that Meg Whitman arrived in September 2011, HP Services was an anemic disaster. Less than a year later, the company wrote off $8B due to the drop in value of EDS.
Dell Services and NTT DATA
So where does this new deal leave the Dell Services and NTT DATA? For NTT DATA, acquiring Dell Services should substantially broaden its exposure and position in key markets in the U.S., the U.K. and Australia, where Dell Services data centers reside. The company noted significant BPO (business process outsourcing) opportunities, especially in healthcare and insurance. Plus, NTT DATA sees substantial benefits in the technology resources related to the deal, including those that will support next gen application and business process service offerings.
For Dell Services, the size and scope of NTT DATA (with 230 data centers worldwide) means that the sale will fill the needs of Dell Services customers. The deal will obviously deliver $3B+ in cash, which will be particularly welcome for Dell given its impending completion of its $67B acquisition of EMC. But that deal includes EMC’s Services, which is focused largely on providing professional services for the company’s enterprise clientele, and should complement Dell’s Global Support and Deployment organization.
In other words, the recently announced deal will provide NTT DATA assets of considerable value to its short-term commercial efforts and long-term business strategies. Just as importantly, the agreement should benefit and satisfy Dell Services’ customers, a critical constituency for both businesses. In essence, NTT DATA’s purchase of Dell Services looks like a win/win for all parties, making it a substantially different transaction with what should be far more positive outcomes than some other technology services deals that come to mind.
© 2016 Pund-IT, Inc. All rights reserved.