Dell outlines vision, expenses for Perot deal

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SAN FRANCISCO - Dell Inc said the acquisition of Perot Systems will help tap new growth markets as it makes a deeper push into technology services.

Chief Financial Officer Brian Gladden said on a conference call on Wednesday that Dell identified more than $300 million in cost reductions from combining the two companies. He also said Dell believes it can grow revenue 5 percent to 7 percent over the longer term.

Dell announced in September it would buy Perot for $3.9 billion, acquiring a company with a strong focus on serving healthcare and federal government customers. The deal closed in early November.

The newly combined services business will have 42,000 employees and annual revenue of roughly $7.5 billion, with about half of that coming from the public sector.

The company expects Perot to add to its non-GAAP earnings in the first year following the deal.

Dell's services will be run by Peter Altabef, who was previously chief executive of Perot. Altabef said the focus will be on increasing automation, performing tasks remotely and using a model of IT-as-a service, including software, infrastructure and applications.

Dell services is big enough to be credible and have scale and yet we are nimble enough to lead a services transformation, he said.

Altabef said both Perot and Dell have traditionally been strong in the the mid-market, in deal sizes ranging from $20 million to $50 million. He said Dell will look to expand the pie of the services business by bringing it to more small and medium-sized firms.

Dell expects to incur expenses through its 2011 fiscal year related to the acquisition. The company estimates it will recognize pretax expense of $120 million to $130 million in the fourth quarter, which ends Jan. 29.

It also sees about $20 million to $25 million per quarter throughout fiscal 2011.

Dell said the new services business will have the greatest scale in healthcare, where it serves most of the hospitals and hospital systems in the United States, providing IT infrastructure and business process outsourcing for billing, among other things.

Paul Bell, head of Dell's public sector business, identified mobile clinical computing and electronic medical records as areas of focus for the services business.

INTEGRATION PROGRESSING

Dell lags far behind rivals Hewlett-Packard Co (HPQ.N) and IBM Corp (IBM.N) in the services market. IT services offer higher margins and a more stable revenue streams than hardware, which currently make up the bulk of Dell's sales base.

Dell relies primarily on sales of personal computers to businesses, which have been severely hurt in the economic downturn. It has seen its global market share in PCs fall to No. 3.

Overall, Dell said its integration of Perot is progressing well and will benefit customers by making information technology solutions easier to access and simpler to manage.

Dell paid a rich 67.5 percent premium for Perot, it's largest ever acquisition. At the time, some analysts said the company overpaid.

Chief Financial Officer Brian Gladden said Dell, with $10 billion in cash, will continue to look at more acquisitions, even as mergers and acquisitions in technology heats up.

Dell expects fourth-quarter revenue from the former Perot business to be similar to what Perot reported in its third quarter, but said there is typically some seasonal softness in the fourth quarter.

Perot's revenue in the third quarter was $629 million.

Dell said separately it planned to lay off 700 workers at a plant in Malaysia as it transfers some laptop manufacturing operations to other facilities.

Dell also said it would incur expenses of $80 million to $120 million in the fourth quarter ending in January, related to the sale of its Poland manufacturing facility to contract electronics manufacturer Foxconn International Holdings Ltd (2038.HK).

The shares of Round Rock, Texas-based Dell rose 2 percent to $13.78 in afternoon trading on the Nasdaq. (Reporting by Gabriel Madway; additional reporting by Franklin Paul; editing by Dave Zimmerman and Andre Grenon)

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