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Reiterating: Dell Needs To Acquire RIM

Posted on Wednesday, Aug 24th 2011

Declining PC sales have pulled down the quarterly forecasts of all major PC manufacturers, and Dell was no exception. In the recent quarter, Dell’s market share slipped from 23.6% last year to 22.6% this year. The market conditions have recently led to the announcement of HP’s plans to spin off its PC segment, although that decision also comes from HP’s new CEO Leo Apothekar’s DNA mis-match with hardware businesses. The news seemed to bolster the rather depressed Dell stock. Analysts believe that Dell will be able to gain market share by attracting customers from HP. The market had shown a similar trend when Dell had gained IBM’s and Compaq’s customers when IBM sold their PC business to Lenovo and when Compaq was acquired by HP.

Dell’s Financials
Dell’s (NASDAQ:Dell) Q2 revenues grew 1% over the year to $15.66 billion, missing the market’s target of $15.76 billion. For the quarter, revenues for commercial business grew 1% over the year to $12.8 billion, Enterprise solutions and services segment revenues grew 4% to $4.6 billion. Servers and networking revenue increased 9% over the year. PC sales have been a matter of concern. During the quarter, they reported a drop of 3% in PC sales to $3.7 billion. EPS for the quarter of $0.54 was higher than the Street’s projected earnings of $0.49 per share.

For the current year, Dell revised down guidance from growth of 5%-9% over the year to growth of 1%-5%.  Dell expects revenues to remain flat sequentially for the current quarter at $15.66 billion. The market was expecting revenues of $16.2 billion.

Dell’s Enterprise Focus
Like HP, Dell is looking to diversify into the enterprise segment. As part of that strategy, the company recently acquired Force10, a provider of high-performance data center networking solutions. Force10 provides global service and support capabilities worldwide through a direct sales force and a network of channel partners and systems integrators. Force10’s annual revenues are close to $200 million. Dell plans to use Force10’s solutions to provide enterprise performance and resiliency and while reducing total cost of ownership, simplifying network deployment, and supporting open, standards-based systems and management solutions. They will integrate Force10’s solutions to their data center portfolio, which includes servers, storage, and services. Terms of the deal have not been disclosed.

Dell’s investments in the enterprise segment in the recent quarters have paid off well. Earlier this year, they acquired storage business from Compellent, where sales have grown 97% sequentially since the acquisition. During the quarter, they also added to their product portfolio by launching Dell EqualLogic FS7500, a solution that added the first scale-out NAS and unified storage capabilities to the Dell EqualLogic platform. Dell claims that the product is the industry’s only scale-out solution optimized for mid-sized and smaller deployments. They also announced their next-generation Dell EqualLogic software, which includes enhanced enterprise-class storage capability and automated load balancing.

Further, they added to the systems management solutions by launching M300 Asset Management Appliance, the first desktop-management product designed for small businesses with twenty to 200 employees. The move is aimed to address the SMB market segment.

I have said all along that Dell will need to align with a mobile phone player, and in light of Motorola’s recent acquisition by Google, the future of Android seems uncertain. If Google goes the way of Apple and develops a closed system and Microsoft acquires Nokia, what happens to Dell? Well, RIM is still independent, and Dell could very well acquire that company to plug a gaping hole, something I suggested a long time ago.

Bottom line, the device business is vertically integrating. To play, a company needs to have an OS to serve PCs, tablets, and mobile phones. Dell doesn’t have anything of the sort. HP tried with Palm and WebOS, but under Apothekar, has decided to back out. That leaves Apple; Google + Motorola; Microsoft + Nokia; and Samsung, LG, Lenovo, Acer, and so forth on the sidelines. And it leaves Dell and RIM. Let’s see how the market shapes up.

Dell’s stock is trading at $14.68 with market capitalization is $26.28 billion. It touched a 52-week high of $17.60 last month.

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