PC maker Dell, Inc. (NASDAQ:DELL) would deploy cash flows to fund acquisitions to boost growth, Reuters reported. Dell could acquire small and medium size companies that would give it access to new technologies, Michael Dell, CEO, said at a business event in Bangalore.
Dell has been on a buying spree last year snapping up companies in different verticals as it wants to diversify itself from a hardware company to the high-margin software, security and cloud computing businesses.
In 2011, the company bought storage firm Compellent; data center networking firm Force10 Networks; Security firm SecureWorks; and cloud computing firm Boomi.
The third quarter results showed that the company's acquisitions are paying dividends as revenue from services business rose 6 percent to $3.05 billion and accounted for about 20 percent of its total sales of $15.4 billion. The segment also delivered gross margin of 31 percent.
As of Oct.28, 2011, Dell has $13.3 billion in cash and cash equivalents. With Dell spreading its acquisition net, let's see who could be the possible takeover targets.
"We believe Dell is on the prowl for a $1B to $3B acquisition in the software space, specifically systems software," Jefferies analyst Peter Misek wrote in a note to clients.
The analyst, who said that Dell is searching for a smaller company most likely an Asian or European player, said Dell's acquisition target will depend on whether they are trying to leverage the core Dell sales channel or alternatively, trying to bolster Perot's positions within certain target segments. The latter would point to a horizontal vendor rather than anything too vertically-specific.
Following are the Dell's possible acquisition targets, according to Jefferies:
CommVault Systems, Inc. (NASDAQ:CVLT):
CommVault, which provides data and information management software applications, has long been subject of M&A speculation by Dell as Dell has consistently represented 22-25 percent of Commvault's revenue through an OEM and reseller arrangement.
"Given Dell's storage investments and the end of the OEM arrangement with EMC, it would make sense for Dell to add backup/information management software," Misek said.
Quest Software, Inc. (NASDAQ:QSFT):
The acquisition of Quest Software would make a lot of sense for Dell, particularly on the margin front.
"We believe Quest would bring greater absolute dollar margin accretion to Dell than CVLT or SWI given the slightly larger size. QSFT will do about $1B in revenue with 20% operating margins (25% EDITDA) and could easily see 10 points-plus of margin accretion on just expense synergies alone," the analyst noted.
Quest Software provides management tools with about 60-70 percent of revenue based on Windows and VMware platform – ideal for indirect distribution and these businesses has lower average selling prices (ASP) and higher volume.
SolarWinds, Inc. (NYSE:SWI):
Jefferies said the entire business model of SolarWinds, which makes enterprise IT infrastructure management software, is about a disruptive sales distribution model. It is a freemium model with low ASPs, short sales cycles, and with lead generation based entirely on web marketing/traffic.
"Due to the low ASPs and comp structure, SWI would not fit well into an HPQ or IBM, but we think SWI would work with Dell's indirect model and Dell is one of the very few strategic buyers that could make sense for SWI," Misek said.
Jefferies said among the three CommVault and Quest Software make the most sense. Meanwhile, other acquisition targets include Constellation Software (TSX:CSU), Fair Isaac (NYSE:FICO), Beijing Ultrapower Software, Pegasystems (NASDAQ:PEGA), NetScout Systems (NASDAQ:NTCT) and Jive Software (NASDAQ:JIVE).