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Dell outbids rivals to buy Quest Software for $2.4 billion

The computer giant, facing falling demand for PCs, makes one of its biggest moves yet to bolster its software business with the acquisition of the Orange County firm.

July 03, 2012|By Ryan Faughnder, Los Angeles Times
  • Dell said it plans to make the Aliso Viejo company Quest Software, which has 1,300 software developers, the core of its software group, which it expects to grow into a $2 billion-a-year business — five times its current size — over the next three years.
Dell said it plans to make the Aliso Viejo company Quest Software, which… (Matt Rourke, Associated…)

Computer giant Dell Inc., facing falling demand for personal computers, made one of its biggest moves yet to bolster its software business.

Outbidding rivals, Dell said Monday that it agreed to acquire Orange County software developer Quest Software Inc. for $2.4 billion. The acquisition will boost its software offerings to businesses and governments, Dell said.

The deal ends a months-long bidding war that saw offers for Aliso Viejo-based Quest rise from an initial bid of $2 billion from a private investment firm.

Dell said it plans to make Quest, which has 1,300 software developers, the core of its software group, which it expects to grow into a $2 billion-a-year business — five times its current size — over the next three years.

Although PC sales still account for more than half of its revenue, Dell has been acquiring software companies to help it move into the software and service industries. The Round Rock, Texas, company's recent purchases include data backup software maker AppAssure and information technology security firm SonicWall.

The Quest deal is Dell's biggest acquisition since it bought information technology service provider Perot Systems for $3.9 billion in 2009.

The Quest acquisition "looks like a relatively reasonably priced way to get a good footprint in this market," said Brian White, an analyst with Topeka Capital Markets.

Dell's revenue fell about 4% year over year in the first three months of 2012, mostly because of its consumer business, which saw a 12% drop from the same period last year. Dell's profit declined 33% to $635 million.

Dell's revenue from PCs, including desktops and netbooks, fell 6% in the first quarter compared with a year earlier.

Quest, founded 25 years ago, has focused on information technology management software. Its clients include Papa John's, Amway, San Bernardino County and the University of Massachusetts Medical School. Last year it posted revenue of $857 million and profit of $44 million.

Dell's acquisition of Quest comes after a series of competing bids, starting when Quest agreed to be acquired by New York firm Insight Venture Partners for $23 a share in early March.

Several other potential buyers came in with higher bids. Insight, joined by Vector Capital, agreed to put up $25.75 a share in mid-June, but a mystery bidder, which turned out to be Dell, followed with $27.50.

Dell then sweetened the deal to pay $28 a share. Some analysts questioned whether Dell's bid might have been too high.

"While the deal does not appear as too pricey, we do think that Dell may have ended up paying slightly higher than it originally intended due to the bidding war situation," Keith Bachman, an analyst with BMO Capital Markets, wrote in a note to investors.

Dell will keep Quest "relatively intact" for now, said John Swainson, president of Dell Software Group. Quest has 3,850 employees.

The acquisition will give Quest access to Dell's reach and distribution, said Vinny Smith, Quest's chairman and chief executive. He added that Quest's products and staff would be the foundation of Dell's software business.

"From my point of view, we've built an awesome company over the years, and I'm particularly proud of the employees that made this possible," Smith said.

Analyst Peter Misek with Jefferies & Co. said Quest's software and storage services will be important for Dell's small and medium-sized business customers. "In [that] market we think they're ahead of their competitors," Misek said.

The software business could potentially be more profitable than the PC business for Dell, analysts said. Quest posted operating margins of 11% last year, versus 7% for Dell, White said. Dell aims to increase margins for its software business to about 12% in the next three years.

"The idea is, someday people won't look at them as just a PC company," White said.

Dell shares fell 13 cents, or 1%, to close Monday at $12.39.

ryan.faughnder@latimes.com

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