Dell Inc. (DELL) recently closed the acquisition of Quest Software for $2.4 billion or $28 a share. The process of buying this company was initiated in July 2012, when Dell edged out its competitors and other bidders to acquire the information technology (IT) management software provider.
The purpose of the purchase was to increase Dell’s product offerings, which may go beyond personal computers. Increasing usage of smartphones and tablets has dented the PC business. Thus, new offerings may act as a growth catalyst.
This is the second biggest acquisition since the company acquired Perot in 2009. This new acquisition might help Dell to strengthen its position in the server, networking and storage service segments.
Moreover, The Quest One Identity and Access Management solution family will also strengthen Dell’s strong set of security assets such as SonicWALL and Secureworks, thereby helping it to serve different customer requirements.
The acquisition marks Dell’s fourth deal this year and also furthers the company’s objective of moving to the higher-margin markets, such as software, storage and services. The initiative would help the company to shift its focus from the traditional PC business, which is putting pressure on its fundamentals.
The shift is critical for Dell’s success in the dynamic and evolving technology sector, where most of the growth in the next few years is likely to be in the storage, software and virtualization segments. Since Dell’s business has been focused on PCs, the company has had to refocus the business and even go in for some cost reduction over the next three years.
The ongoing uncertainty in the PC market has led Hewlett-Packard Company (HPQ) and Dell to shift their focus toward the high-margin enterprise solutions market.
However, it is not ignoring the PC segment either. The company recently announced a range of PCs built on the Ultrabook model. Concurrent with the three new PCs, Dell introduced the PowerEdge C8000 series of servers to support high-performance computing and big data applications. The servers will facilitate space saving, reduce costs by saving energy and improve data center performance at a high temperature.
Despite Dell’s upcoming product momentum, we recommend avoiding the shares because of overall PC market health, declining fundamentals and a high debt burden.
Currently, Dell has a Zacks #5 Rank, implying a short-term Strong Sell rating.
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