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Dell Service Centres?

11/14/06

Dell Computer had been suspending gravity for so long that one could almost think it’s invulnerable to the fierce margin pressures and market saturation that otherwise characterize the PC hardware business.

But it turns out those pressures are inexorable after all. The firm has missed its profit projections the last few quarters. And while recovering somewhat lately, its $25 stock price is still short of last year’s $30 and even further below where the stock was two years ago, $40. Net income is uninspiring at about 5%, as is growth, also about 5%.

What’s a hardware player to do? What IBM and HP have done -- move into the fatter-margin IT services business, a market strategically next door. Dell is doing that, albeit cautiously, with its recently announced acquisition of ACS, a Scottish infrastructure consulting shop that generated $15M in 2005 sales. The deal (terms not announced) is first meant to capitalize on the imminent flurry of upgrades and snafus that typically follow a major Microsoft operating system release, in this case Vista. But the longer term signal is that Dell is thinking about what it takes to sell IT services to business clients.

Dell doesn’t do much M&A: its last deal was a $40M purchase of a vendor of “strategic interactive consulting and development services” way back in 2002, company by the name of Plural. ACS, on the other hand, is more practical: it specializes in customized software installations, a skill set that Dell says it plans to take international.

Plural and ACS are small steps indeed for the $57B (sales) Dell. But who’s carping? At least management is alert and agile enough to know that they may need to diversify out of an industry entering the long tunnel of global commoditization.


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