QSFT Quest Software, Inc. (MM)

After battling with other bidders over the past few months, Dell Inc. (DELL) has finally snapped up information technology (IT) management software provider Quest Software Inc. (QSFT). Dell edged out its competitors with a striking offer of $2.4 billion (net of Quest’s cash and debt).

The purchase consideration translates to $28.00 a share, which is a slight premium over Quest’s closing share price of $27.82 on Monday. The deal has already been approved by the boards of directors of both companies and is expected to close in Dell’s fiscal third quarter ending October 2012.

A Good Deal for Dell

California-based Quest Software develops network and database management software and offers a wide range of solutions to deal with IT challenges. Quest’s offerings will go hand-in-hand with Dell’s offerings and would expand the latter’s software capabilities in systems management, security, data protection and workspace management.

Moreover, Quest also brings on board 1,500 software sales experts and 1,300 software developers, which are expected to generate $1.2 billion of software revenue, annually.

Also, Dell could make its presence in the software space more stable, putting pressure on H-P, which is on a similar mission.

The Bidding Drama

Many software vendors were chasing Quest Software since the beginning of this year. Among the bidders, Quest found the offer made by private equity firm Insight Venture Partners competitive. Insight, which partnered with Vector Capital, offered a price of $23 per share or $2.0 billion in March. In June, Dell and Insight entered into a neck and neck bidding war. Dell’s $2.15 billion offer was outshined by Insight’s hefty $2.17 billion.

The Quest bid reminds us of the dramatic 3PAR bidding war between the PC bigwigs Dell and Hewlett-Packard Co. (HPQ) in 2010. Dell lost the bid to its archrival.

Conclusion

The acquisition reflects the fourth consecutive deal by Dell this year and also furthers the company’s objective of moving to the higher-margin markets, such as software, storage and services. The initiative would help the company to shift its focus from the traditional PC business, which is putting pressure on its fundamentals.

The shift is critical for Dell’s success in the dynamic and evolving technology sector, where most of the growth in the next few years is likely to be in the storage, software and virtualization segments. Since Dell’s business has been focused on PCs, the company has had to refocus the business and even go in for some cost reduction over the next three years.

The basic idea of this cost reduction initiative was to support current profitability, with the longer-term objective being a move from the traditional computing business to a high-margin enterprise-class software and services business. The costs saved will also help fund further acquisitions targeting the higher-margin segment.

Dell’s shares slumped 5 cents in the after-hours reflecting integration risks, a higher debt burden and concerns regarding the uncertain PC market.

Currently, Dell has a short-term Sell recommendation, as indicated by the Zacks #4 Rank.

 
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