Dell Wants More Software for its Computers
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Hardware giant Dell (NASDAQ: DELL), which primarily sells desktops and personal computers, has decided to acquire Quest Software (NASDAQ: QSFT), a provider of management software solutions that helps companies solve their IT problems. Dell is facing stiff competition in hardware from Hewlett-Packard (NYSE: HPQ) and Lenovo, and hence, it is looking toward other sources to keep its revenue stream running.
End to the Bidding Fight
The purchase price for the software maker, now fixed at $2.36 billion, was agreed after a prolonged war between Dell and many others, such as Insight Venture Management and Vector Capital. The deal was won by Dell with an offer at a premium of 44% to the initial price quoted.
Surprisingly, this comes in after the company announced that it will be initiating a cost-cutting plan after it performed badly in its recent quarter. The savings targeted under the plan is $2 billion over the next 3 years. This suggests that Dell is looking to offload some of its unnecessary baggage and is focusing its energies toward inorganic growth to enhance revenue.
By spending more than a couple of billion dollars, Dell wants to strengthen its software business, which is expected to make the computer giant’s segmental revenue at $1.2 billion annually. It will further enhance its potentials in security, networking and systems management.
Not only will the service of data center management solutions be strengthened, but it will also enhance the enterprise solutions products for which the company has recently formed the Software Group. Dell’s Software Group is an initiative taken to build on its software capabilities and to have a competitive advantage.
With an effort of increasing exposure to software products and services, Dell is venturing into commercial business offerings since they provide higher margins and a relief from worsening conditions in the hardware segment. This has been the case with many hardware providers because consumers are switching to other ways of surfing the internet, including tablet computers and cell phones, the most popular being Apple’s (NASDAQ: AAPL) iPad. In fact, Apple’s iPad sales were much higher than PCs sold by any of the PC makers, Hewlett-Packard and Dell being among them, in the recent quarter. Moreover, sales of tablets are expected to more than double from last year, according to analysts. Hence, the idea of catering to business customers came in among the industry players, Hewlett-Packard being one of them. Hewlett-Packard, Dell’s arch rival, has been treading a similar path with its recent acquisition of Hiflex Software GmBH, strengthening its software offerings in December 2011.
Dell, one of the most prominent players in the IT industry, has been on an acquisition spree for the last two years, buying almost 14 companies in two years’ time. Each acquisition has its own set of targets for Dell to achieve with some strengthening its existing capabilities and some to add to its portfolio of products and services. Quest Software is going to more than benefit the company since security has become increasingly important for enterprises. This will help the higher-margin software segment to grow, helping the PC maker perform attractively.
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