Why Dell should buy Sun Micro (and Lexmark too)

Sep.19, 2008 in Investment Opinions, Mergers and Acquisitions, U.S Hot Stocks

What Dell must do

Commentary: Acquiring Sun Microsystems will get it back on track

By John C. Dvorak

Last Update: 9/19/2008 12:00:00 AM

BERKELEY, Calif. (MarketWatch) — Every time I hear bad news about Dell’s
quarterly earnings and compare it to stories about Hewlett-Packard, I keep
wondering what Dell can do to get back on track as the nation’s most dynamic
computer company.

If you look at H-P’s acquisitions, you realize that buried inside all of the fish
that were eaten was Digital Equipment Corp. and Tandem Computers, which were
gobbled up by Compaq computer before H-P gobbled up Compaq. In the process, what
was once a thriving mini-computer industry has mostly been consolidated into the
desktop computer industry.

The exception is Sun Microsystems (JAVA), which was never gobbled up even though
various talks with Apple came and went. With Sun’s market cap around $6 billion,
I think it’s time for someone to buy the company.

Dell (DELL) could use the expertise and talent at the company and perhaps
re-energize development of its RISC-based servers.

At least it would put Dell on a more equal footing insofar as the high-end
servers are concerned and give it more insight into that old mini-computer
marketing channel and infrastructure. In the process, it would also give Dell
some major R&D chops.

A Sun acquisition also would give the company some outstanding UNIX code with the
Solaris OS and allows it to control the Java platform developed by Sun.

While Dell’s computing division is digesting Sun, it should plunk down another $3
billion to $6 billion and acquire Lexmark International Group (LXK), the printer
company. Dell and Lexmark are already working together on many of the Dell
printer offerings, so they may as well get married.

Lexmark, valued at just under $3 billion today, has a good reputation as the
“other” printer company lagging behind H-P (HPQ), Xerox (XRX), Canon and Epson.
They don’t have a bad reputation and would benefit from a facelift and a Dell
logo.

There are a number of branding strategies that could be employed that would
optimize the strength of both brands. Lexmark could bring new channels to Dell
and would be more competitive against H-P as part of Dell than it would
separately.

I never got the sense that Dell ever fully understood the nature of the ink
business the way H-P and the others do.

Dell needs to make some bold acquisitions, both to get new blood into the company
and to do a better job of tackling H-P on new fronts. After H-P purchased Compaq,
a Texas company that could be credited with inventing the PC-compatible industry,
Dell should have gone on an acquisition rampage. It didn’t.

But in this depressed market, Dell could get a lucky break, as companies like
Sun, Lexmark and others are priced to sell.

H-P bought Compaq for $25 billion and essentially got the remnants of DEC and
Tandem in the process. The actual net result was to remove Compaq from the list
of competitors for both H-P and Dell.

At the time, the deal probably benefited Dell more than H-P itself, but over the
longer term Dell has suffered.

Buying Sun would be smart because Sun can be kept in play as a big iron
competitor and be highly targeted at H-P with the additional resources of Dell to
back them up. It just seems like a perfect fit.

That said, Sun is just as likely to be acquired by H-P and added to the
portfolio, leaving Dell to languish in Austin. Either way, something has to
happen with these companies sooner rather than later.

Then again, with a market cap of around $35 billion, perhaps someone should
simply buy Dell. That would be interesting too.

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