Why Dell (DELL) Is Toast

Dell (DELL) has a problem, or a series of problems. Its share of the PC and server businesses is under pressure from IBM (IBM), HP (HPQ), IBM (IBM), Sun (JAVA), Hitachi, and other companies based in China and Taiwan.

If IBM buys Sun, it ends up with a much larger piece of the server market and may create even more competition in the sector for Dell. IBM and HP have already diversified into the highly profitable IT service and software businesses. Dell has a very small services business.

HP made a big move to bolster its services operation by buying EDS. It picked up a large services firm and was able to lay off about 25,000 people to improve margins.

Dell’s shares are so low because of its lack of success in driving up earnings and picking up market share that the company’s market capitalization is down to $19 billion. That means it does not have the “currency” to make a significant move into the services business by acquiring one of the large companies in that sector.

The most logical, and desirable, buyout candidates in IT services are probably Accenture (ACN) and CA (CA). Even with a recent sell-off in Accenture stock, due to analyst downgrade, the firm has a market cap of $16 billion.  CA’s is almost $9 billion. It is safe to assume that neither company would sell out for a premium of under 30%.

The 55% sell-off in Dell shares over the last two years has hurt shareholders, but it has also painted the company into a corner which makes a significant acquisition difficult.

Douglas A. McIntyre