Dell: What Will It Buy?

Eric Savitz, from Avian Securities specialized in brokerage services, softdollar services and information technology research, wrote on a Barrons’ blog:

Dell: What Will It Buy?

Dell CFO Brian Gladden indicated in a story in the New York Times that the company needs to diversify its revenue base, and could make acquisitions in several areas: servers and storage systems, software and services. Certainly, the company has the capacity to make some significant purchases, with $8.5 billion in cash and short-term investments as of the end of October. So what might they buy?

Avi Cohen, managing director at Avian Securities, has some ideas about potential candidates, but sees plusses and minuses in each case. He outlined them in a brief research note:

Sun Microsystems (JAVA). Market cap: $3.1 billion.

Positives: Pulls Dell into the Unix server market. Lots of room for cost cutting and component sourcing synergies.
Negatives: Flat to declining server revenues. Fragmented storage strategy. Java open source push ‘has not yielded dividends.’

CommVault (CVLT), Market cap: $499 million.

Positives: Dell is already 20-30% of the company’s revenues in any given quarter. High gross margins. Strong Dell sales force ‘would take care of CVLT’s most significant weakness.’
Negatives: Enterprise backup wins require strong support ‘traditionally a Dell weakness.’ Loss of hardware independence could weigh on growth in the long run.

Compellent (CML) and 3Par (PAR): Markets caps: CML, $274 million; PAR, $470 million.

Positives: Both would be margin accretive. Both would fill fiber channel storage gap in Dell’s own product line.
Negatives: Both require strong support. Some market overlap. Could cause friction with Dell’s EMC relationship.

Data Domain (DDUP): Market cap, $1.1 billion.

Positives: Would put Dell in first place in emerging data deduplication market. Would extends sales reach for DDUP’s products.
Negatives: Conflicts with recently signed EMC deal. DDUP does not yet address general storage – they focus on back-up storage – meaning Dell might have to make another storage acquisition.