Dell, IBM Clash Over M&A Executive

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Executive Bonuses Linked to Takeovers

Even with those limits, Johnson's employment at Dell is a setback for IBM, says attorney Lewis. "It's definitely a positive for Dell," she says. IBM will eventually need to show that Johnson possesses true trade secrets, not just highly valuable skills, Lewis says, citing a June 9 ruling by a federal judge in Wisconsin that let a former Clorox (CLX) executive begin working for rival S.C. Johnson & Son, despite what Clorox said is sensitive information about its operations known by the executive.

Hiring Johnson isn't Dell's only move to amp up its buyout capabilities. Executives, including enterprise group president Steve Schuckenbrock and public sector group president Paul Bell, have been asked to look for acquisition candidates, and part of those executives' bonus payments are tied to acquisition-related growth in their divisions, says a person close to the company. The plan is tied to a company realization that Dell's prospects for profitable growth through selling more hardware are limited, this person says.

Dell's Frink declined to comment on specifics of the plan, although he says many employees are responsible for bringing good ideas for acquisitions to their managers and that growth is an element of measuring all employees' success.

In addition to building a war chest of $10.1 billion in cash and short-term investments as of the close of the quarter that ended May 1, Dell has been raising debt to augment its buying power. It raised $1 billion in bonds on June 10 that it will likely use to finance acquisitions, Kaufman Bros. senior analyst Shaw Wu wrote in a June 11 research note. "Dell needs to take bigger and bolder steps" to compete with IBM, Hewlett-Packard (HPQ), Apple (AAPL), Acer, and Cisco Systems (CSCO), said Wu, who has a "hold" rating on Dell's stock.

Tech Companies: Cheap and Willing

Analysts say possible targets for Dell include Palm (PALM), Motorola (MOT), BMC Software (BMC), and Affiliated Computer Services (ACS). Adding consulting expertise now would be a timely move. Microsoft (MSFT) plans to release its Windows 7 operating system in October and computer makers could benefit from businesses' pent-up demand for new PCs running the system—and for the expertise to install it efficiently.

As Dell looks to bulk up, it may benefit because tech companies are willing to deal amid a slow sales environment and depressed stock prices. On June 4, Intel (INTC) spent $884 million to buy software maker Wind River Systems. Storage companies NetApp (NTAP) and EMC (EMC) are duking it out over Data Domain (DDUP). "Asset prices are getting pretty attractive and certainly we're looking at expanding inorganically," Chief Executive Michael Dell said in a conference call with Wall Street analysts on May 28.

At the same time, it faces a formidable opponent in IBM. Tech companies have been turning to the courts to prevent valuable employees from jumping ship as vendors develop expertise in areas that open new fronts of competition. Last October, IBM sued to prevent Apple from hiring chip expert Mark Papermaster in a case that was eventually settled. IBM and Papermaster agreed to delay his starting date at Apple and agreed that Papermaster would keep sensitive IBM information confidential. On June 3, a California judge blocked former EMC executive David Donatelli from overseeing Hewlett-Packard's storage business, though he continues to work at HP.

Finally, Dell needs to show investors that it has the chops to absorb acquisitions at a faster pace. "Whatever they buy, I hope it's small and easy to integrate," says Jayson Noland, a senior analyst at Robert W. Baird, who has a "neutral" rating on Dell stock. "Large, transformational M&A is going to cause all sorts of risks and uncertainty."

Retaining Johnson and building an M&A team around him could help allay investors' worries. No wonder Dell is going to such extraordinary lengths to keep him.

Ricadela is a writer for BusinessWeek in Silicon Valley.

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