Technology firm Dell Inc. (Nasdaq:DELL) recently announced a material move into the software space in the industry and will acquire Quest Software Inc. (Nasdaq:QSFT) for around $2.4 billion. The move is a good one for Dell, but investors may have another of more appealing options to consider.
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In the deal press release, Dell announced it was buying Quest for $28 per share. This works out to an aggregate purchase price of $2.4 billion, which nets out Quest's cash and debt. Dell expects to close the deal during its third quarter. Dell pitched the deal as a "strong strategic fit" and it does make sense as Quest's software exists to help IT workers and managers more easily do their jobs. Specifically, Dell stated Quest would fit well into its SonicWALL and SecureWorks security software solutions. Quest also provides performance monitoring capabilities and database management services.
For all of fiscal 211, Quest reported $857 million in revenue and operating margins of 11%. Dell stated its total annual software sales would now be about $1.2 billion, meaning Quest would represent more than 70% of the total. Dell can easily fund the purchase, as it reported nearly $13 billion in cash on its balance sheet and long-term debt about $6 billion. This was as of the end of its fiscal first quarter.
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Outlook and Valuation
Analysts are still updating their models to reflect the fold in of Quest, but currently still project a full-year sales decline of 3.3% at Dell and total revenues of $60 billion. They expect earnings of $1.94 per share. This puts the forward P/E in very reasonable territory at 6.7.
Dell currently sports a market capitalization of $22 billion. This means the Quest deal is significant at nearly 11% of its total market cap, but not something that will make or break the total firm. It will boost profitability though as Dell reported operating margins of only 5.7% during its first quarter, or close to half of those of Quest.
The Bottom Line
The company is on the right path as it looks to gain exposure to faster-growing, more profitable businesses in the technology sector. Software is among the most profitable businesses, and growing briskly, thanks in good part to software through cloud computing instead of traditional downloads to personal computers or corporate desktops.
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However, there are just as many purer play software and service firms that don't have the more mature computer hardware operations that Dell does. With software only accounting for a couple of percent of sales currently, there are likely more compelling investment opportunities. Tech giant International Business Machines (NYSE:IBM) got out of hardware to focus on software and services close to a decade ago. Accenture (NYSE:ACN) is a more pure service provider, as are the Indian IT giants of Wipro (NYSE:WIT) and Infosys (Nasdaq:INFY).
Ryan C. Fuhrmann owns shares of IBM since 2010.