Bloomberg News

Dell Losing Out With PCs Transforms Citrix Into Target: Real M&A

October 16, 2011

Oct. 17 (Bloomberg) -- Michael Dell wants to use some of his company’s $16 billion in cash for acquisitions to counter slumping demand for personal computers. That may put Citrix Systems Inc. and Informatica Corp. on his shopping list.

Dell Inc., the world’s third-largest PC maker, has lost almost a quarter of its market share in the past five years as Asian rivals introduced lower-priced models and eroded profits. After reporting its biggest revenue decline in 2010, sales at Dell will increase by 3 percent or less this fiscal year and next, according to analysts’ estimates compiled by Bloomberg.

While Dell made almost two dozen acquisitions that averaged less than a billion dollars each in the past five years, it may now need bigger takeovers to boost growth and expand in software and networking, said Sterne Agee & Leach Inc. Citrix, which sells programs that let companies cut the number of servers they run, and Informatica, a provider of data integration software, are among 14 U.S. software suppliers that analysts say will generate twice as much sales growth this year of the median American company after producing double the operating income per dollar of revenue in the past year as Dell itself.

“Dell is suffering through the commoditization of hardware,” Keith Wirtz, who oversees $16.7 billion as chief investment officer at Fifth Third Asset Management in Cincinnati, said in a telephone interview. Citrix and Informatica “make sense. Dell needs to further diversify their array of products. Software is a natural consideration. Citrix seems like a natural just because of the nature of Citrix,” he said.

Relative Value

Dell, the 46-year-old founder and chief executive officer of the namesake company, said at the inaugural ‘Dell World’ conference in Austin, Texas, last week that the PC maker’s cash gives it “plenty of capability” to make more acquisitions.

Emily Dunlop, a spokeswoman for the Round Rock, Texas-based company, declined to comment on potential takeover targets and referred to Dell’s statements from the conference.

Worth almost $150 billion at its peak more than a decade ago, Dell is turning to takeovers after losing more than half its market value since the start of 2006. Over the same span, the Standard & Poor’s 500 Index fell 1.9 percent, while the average technology company in the benchmark gauge for American common equity gained 28 percent.

Dell has stumbled as Asian competitors from Lenovo Group Ltd. to Acer Inc. took a greater share of the PC business with lower prices and consumers turned away from desktops and laptops in favor of tablet computers such as Apple Inc.’s iPad.

Plugging Holes

Once the world’s largest PC maker, Dell’s revenue from desktops tumbled 32 percent in the past five years as the average price of a personal computer fell more than 20 percent to $726 each, data compiled by Bloomberg show.

During that time, the company’s share of the PC business by unit shipments shrank almost a quarter to 12.5 percent.

Last quarter, Dell was supplanted as the second-largest PC maker by global shipments as Lenovo, based in Beijing and Morrisville, North Carolina, rose to that position for the first time, according to Stamford, Connecticut-based Gartner Inc.

Attempts by Dell to enter the mobile-computing market with its Venue Pro smartphone and Streak tablet have also failed to gain broad consumer acceptance.

Dell is in “a little bit of a box,” Anand Srinivasan, a computer hardware analyst for Bloomberg Industries in Skillman, New Jersey, said in a telephone interview. “Software is the hole that you need to plug. How do you fill it? That’s where their acquisition strategy comes in,” he said.

‘Tiny Acquisitions’

While David Johnson, Dell’s head for mergers and acquisitions, said last week it would avoid “big, blockbuster” deals in favor of buying smaller companies to build its information-technology services, networking and data storage businesses, that strategy has failed to forestall an almost 30 percent drop in its operating margin in the last half-decade.

Of the 20 deals that Dell has completed over that span, only two have exceeded $1 billion, according to data compiled by Bloomberg, as Dell still relied on PCs for about half its $61.5 billion in sales last year.

“Instead of those tiny acquisitions that don’t ultimately have enough critical mass to provide any kind of uptick to the growth path that Dell is currently on, they do need to venture into something,” Mark Luschini, chief investment strategist at Philadelphia-based Janney Montgomery Scott LLC, which manages $54 billion, said in a telephone interview. “Dell is in a position where they have to do something transformative.”

Takeover Criteria

Among software and computer-services providers in the U.S. between $1 billion and $15 billion in value, there are 14 companies that will increase sales twice as fast as the median S&P 500 company this year based on analysts’ estimates, and had operating margins that were more than double Dell’s 7.3 percent in the past 12 months, data compiled by Bloomberg show.

Sales at Citrix, the largest of the group with $11.9 billion in equity value, are projected to rise 16 percent this year, versus 7.5 percent growth for the median S&P 500 company.

The provider of software that enables workers to use their office applications from home via the Internet has also expanded into so-called virtualization software and cloud computing, which lets businesses run programs on servers in remote data centers. In July, Citrix bought Cloud.com Inc., which helps companies manage data traffic on their servers.

“This is an area where Dell needs to be stronger,” said Shaw Wu, an analyst at Sterne Agee in San Francisco, who cited Citrix as a potential takeover target.

Data Integration

Eric Armstrong, a spokesman for Fort Lauderdale, Florida- based Citrix, didn’t immediately return a telephone call or an e-mail seeking comment.

Informatica could also be a takeover candidate because it sells software that lets companies manage, integrate and analyze data from different computer systems, Sterne Agee’s Wu said.

After tripling its adjusted net income in the past five years, analysts now estimate that Informatica’s earnings will jump 33 percent in 2011, data compiled by Bloomberg show. The $5.1 billion company has also earned 20 cents in operating income for every dollar of sales in the past 12 months, almost three times as much as Dell’s margin.

Deborah Wiltshire, a spokeswoman for Redwood City, California-based Informatica, said the company doesn’t comment on takeover rumors or speculation.

Dell may stick to smaller takeovers as it tries to cobble together niche businesses and transform itself into a “one-stop shop” for computer servers, networking gear and software, said Ashok Kumar, an analyst at Rodman & Renshaw LLC in New York.

‘Elephant Hunting’

The PC maker may also be avoiding bigger deals after it boosted its stock-buyback program by $5 billion last month, according to Barclays Plc. Prior to the announcement, Dell had more than $2 billion remaining in authorized repurchases after buying $1.6 billion of its stock in the first half of the year.

Dell would need more than $16 billion to acquire Citrix, based on the average takeover premium of 36 percent for software deals worth $5 billion or more, data compiled by Bloomberg show. Informatica would cost almost $7 billion.

Both would exceed the $3.9 billion that Dell spent on Perot Systems Corp. in 2009, its largest ever transaction.

“We do not think the company is going to go elephant hunting,” said Rodman & Renshaw’s Kumar.

Dell could still benefit from targeting smaller businesses in the health-care software industry, which would complement its purchase of Perot Systems. Dell gained customers from hospitals to health-insurers and the Centers for Disease Control and Prevention after acquiring the company founded by former U.S. presidential candidate H. Ross Perot.

Quality Systems

“Health care is a space that comes to mind because of the significant services business through the Perot acquisition,” said Bloomberg Industries’ Srinivasan. “To acquire a health care-based software company would fit in very nicely with their services offering and as a result it makes their health-care vertical focus that much more important.”

That could make Quality Systems Inc., which sells software that manages health records for doctors and dentists, an attractive target, according to Fifth Third’s Wirtz.

Irvine, California-based Quality Systems, which has a market value of $2.6 billion, increased full-year revenue by at least 18 percent each year since 2002, data compiled by Bloomberg show, while its operating margin of 28 percent is almost four times higher than Dell.

Quality Systems also announced an agreement in August that allows Dell to market and sell some of its health-care products.

Moving the Needle

Susan Lewis, a spokeswoman for Quality Systems, declined to comment on whether it had been approached by Dell about an acquisition or is contemplating a sale.

Dell could even consider making a bid for Research In Motion Ltd., the maker of the BlackBerry smartphone, according to Matt McCormick, a money manager at Cincinnati-based Bahl & Gaynor Inc., which oversees $4.1 billion.

RIM is valued at $12.6 billion after plunging more than 80 percent from its all-time high in 2008. Marisa Conway, a spokeswoman for the Waterloo, Ontario-based company, said it doesn’t comment on takeover rumors or speculation.

Michael Dell “has to do something that is going to move the needle,” Bahl & Gaynor’s McCormick said in a telephone interview. “Something that’s going to make people say -- this is different from the normal pattern, they are serious about increasing their margins, increasing their earnings.”

Dell needs to “put the money to work,” he said.

--With assistance from Danielle Kucera in San Francisco. Editors: Michael Tsang, Daniel Hauck.

To contact the reporters on this story: Aaron Ricadela in San Francisco at aricadela@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net; Tara Lachapelle in New York at tlachapelle@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Tom Giles at tgiles5@bloomberg.net.


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