Dell Inc. said Monday that it will spend more than $2 billion to buy a California software company in a deal aimed at bolstering the company's ambitious business transformation plan.
The Round Rock-based computer maker said it has agreed to buy Quest Software of Aliso Viejo, Calif., for about $2.4 billion in cash in a deal that will be Dell's second-largest acquisition ever, trailing only the $3.9 billion paid for Perot Systems in 2009.
Quest, which has more than 3,800 workers, more than 100,000 customers and $857 million in revenue in its most recent fiscal year, is expected to be the basis for what Dell hopes will become a multibillion-dollar software business.
That software business is expected to generate its own growth and profits and help Dell sell more high-end hardware, including servers, storage systems and networking as well as services. Dell officials were undecided Monday about what Quest would be called after the acquisition is completed, said John Swainson, president of Dell Software.
"Quest brings Dell a portfolio of software products that will be the foundation of our software products going forward," Swainson said.
Getting stronger in software is key to Dell's future because more of its customers want to buy critical software and hardware for their information technology needs from a single supplier.
"Our customers are trying to buy these things together rather than in piece parts. That is what customers want," Swainson said.
Dell -- which employs about 110,000 people worldwide, with about 16,000 of those in Central Texas -- has been making a concerted effort to rebuild the company through acquisitions since company founder Michael Dell retook control in 2007. Since then, Dell Inc. has spent about $10.3 billion on a range of acquisitions of companies involved in advanced storage systems, networking, services and software. Quest adds a big software piece to that mix.
The Quest deal came with a bit of struggle. Dell had to outbid two investment companies, Insight Venture Partners and Vector Capital, that had teamed up to pursue the company. Insight had offered to buy Quest for about $2 billion in March, but the software company was allowed to "go shop" for a better offer. Dell joined the bidding as an unnamed "strategic bidder" in June and the price rose to $28 a share, or nearly $2.4 billion.
Swainson said Quest has a broad portfolio of attractive products, but two key strengths are its products that provide secure access to company computer networks and those that monitor and manage the performance of software applications that run on groups of computers.
Both of those capabilities, he said, are crucial to customers considering whether to shift their information technology operations to cloud computing setups in remote data centers. Dell expects cloud computing technology will be a growth area because it delivers cost-savings and flexibility. But customers want to be assured that cloud computing operations are secure and easy to manage, analysts said.
"Our goal is to build a meaningfully large software business for Dell," Swainson said. "Given that Dell is a $62 billion company, that means we will have a software business in the billions of dollars (of revenue). (The Quest deal) helps us start on this goal, but we won't end here."
Analysts called Quest a good addition that fits well with Dell's existing business, but they noted that Dell has more work to do to compete against rivals such as IBM Corp., Hewlett-Packard Co. and Oracle Corp., which all have substantial software holdings.
"Quest is a good start for Dell," said Brian Marshall with ISI Group. "Software has been an Achilles' heel for Dell because it gets only about $350 million in revenue from sales of its own software."
Quest gives Dell substantially more software revenue and higher profit margins that will bolster corporate profits, he said.
"Computer makers have to be strong in software," Marshall said. "Software is the soul of the product, as (late Apple Inc. co-founder) Steve Jobs put it. If Dell is going to do a better job of competing in selling enterprise infrastructure, they are going to have to have more software. But there are limited software assets out there that are acquirable." Quest, he said, gives Dell a starting point to build on.
"Quest is probably the linchpin of Dell's software business," said analyst Rob Enderle with the Enderle Group. "This is where we get to see if the (software) model is going to work. Up until now, Dell has mainly had a loose confederation of software companies, and this is going to tie it together into a formal division."
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