The Health Care M&A Monthly: Dell Buys Perot Systems--

Enhances Services Offerings In $3.9 Billion Deal

September witnessed the largest acquisition in the e-Health industry during the past 10 years. Dell (NASDAQ: DELL), the personal computer giant, announced an agreement to buy Perot Systems Corporation (NYSE: PER) for $3.9 billion to expand its services offerings and diversify its source of revenue.

Based in Round Rock, Texas, Dell designs, develops, manufactures, markets, sells and supports computer systems and services worldwide. It is best known for its computer hardware, including, but not limited to, desktop PCs and workstations; notebook computers; and servers and networking products. On a trailing 12-month basis, DELL generated revenue of $53.7 billion, EBITDA of $3.7 billion and net income of $1.8 billion.

However well entrenched Dell may be in the hardware business, its core personal computer business has been struggling. While Dell does sell third-party software, the company has been looking to acquire a more substantial services business in order to diversify its sources of revenue. It was not unexpected that Dell was serious about entering the M&A market. The signs were there. Earlier this year, the company hired IBM Corp.’s (NYSE: IBM) former M&A chief and it has raised almost $1.0 billion by selling debt securities since March.

Based in Plano, Texas, Perot Systems provides IT, or information technology, services and business solutions worldwide. Among its many infrastructure services are data center and systems management; application services; Web hosting and Internet access; and network management services. The company’s business process services include claims processing; life insurance policy administration; call center management; payment and settlement management; and services to improve the collection of receivables. The company serves the banking, insurance, health care, manufacturing, telecommunications, travel and energy industries. While Perot Systems is not a pure-play e-Health company, it derives approximately one-half its revenue from health care: 48% in 2006, 51% in 2007 and 47% in 2008. On a trailing 12-month basis, PER generated revenue of $2.64 billion, EBITDA of $278.0 million and net income of $118.0 million.

Under the terms of the transaction, Dell will pay $30.00 in cash for each share of PER stock. This bid thus offers PER shareholders a 68% premium to the stock’s prior-day trading price. The price to revenue multiple is approximately 1.5x while the price to EBITDA multiple hovers around 14.0x.

Even after this deal closes, Dell’s services arm will be much smaller than IBM’s or Hewlett-Packard’s (NYSE: HPQ). Thus, for the deal to deliver, Dell will have to do more than just capitalize on its cross-selling potential. The company might well consider expanding PER’s health care business. Whatever the ultimate shape that health care reform will take that is now slogging through Congress, it will likely include an increased demand for electronic health records and other products that are the lifeblood of e-Health. In what the market considered a copycat deal, one week later, Xerox Corp. (NYSE: XRX) announced plans to buy Affiliated Computer Services (NYSE: ACS) for $6.4 billion. However, since ACS derives only a small part of its revenue from health care, we will not be entering this deal in our databases.