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Dell this week inched forward in efforts to cut its over-dependence on PCs and other computer hardware, agreeing a $2.4bn deal designed to kick-start a new software division.
The purchase of Quest Software followed a bidding war with private equity investors that saw Dell prevail with an all-cash offer that valued Quest’s shares at 45 per cent more than before bidding began.
Though paying a hefty price – equivalent to 17 times Quest’s forward earnings, compared to multiples of 11-12 times earnings that comparable companies trade at – Dell justified the deal on the importance of Quest’s systems management software. This plays a central role in how companies manage their IT systems and should provide a foundation for Dell to expand into a wider range of corporate software, analysts said after the deal was announced.
However, while the acquisition will lift Dell’s software revenues from around $300m a year to $1.2bn, that still leaves software comprising only 2 per cent of Dell’s total expected sales this year.
John Swainson, a former chief executive of software maker CA who heads a new Dell software division set up earlier this year, said the acquisition was the first step towards turning software into a “meaningful” business for the company, without giving further details of its plans.
It still has a long way to go to catch up with industry leader IBM. Big Blue shed its own PC division in 2004 and had been investing heavily in software long before that. Thanks to the higher margins of that business, software, which accounted for 23 per cent of IBM’s revenues in its latest quarter, contributed 44 per cent of its pre-tax income.