After shifting its focus from the traditional PC business to the higher-end data storage market or cloud computing, PC maker Dell Inc. (DELL) is now exploring opportunities in the networking vertical. Dell’s intentions were highlighted by its purchase of Force 10 Networks last week, which is an enterprise networking company, for an undisclosed amount.
Force 10 develops and markets network infrastructure equipment, including high density 10 Gigabit and 100 Gigabit Ethernet, to a variety of corporate, educational and government enterprises. It has offices in North America, Europe and the Asia-Pacific regions.
The newly acquired intellectual assets will go hand-in-hand with Dell’s explicit data center portfolio. Dell will now be able to offer an extensive range of data center solutions, giving its customers a chance to streamline operations, reduce IT costs, manage data growth and simplify management.
The transaction has already been approved by the board of directors of each company and is expected to be wrapped up within a month or two. It is unclear as to what extent the acquisition will be financially accretive to Dell’s fundamentals. But we believe that Dell will benefit from Force 10’s rich customer base. Further, Dell intends to keep Force 10’s Indian operation. This will support its plan to expand in India through strategic investments.
Not only is Dell expanding its networking capabilities, it is also enhancing its server and storage offerings to widen the range of its comprehensive enterprise offerings. We believe this approach is exactly what Dell needed to do, given the capabilities of its competitors, most notably, Cisco Systems Inc. (CSCO) and Hewlett-Packard Co. (HPQ).
Last month, at its analyst day meeting, Dell provided a blueprint for growth. The company asserted its intent to continue with successive acquisitions to increase its portfolio of Enterprise offerings. The Force 10 acquisition seems to be in line with the company’s growth initiatives.
Gartner, the technology research firm, recently reported that it expects worldwide spending on IT products and services to grow 7.1% in 2011, considerably higher than its earlier estimate of 5.6%.
Though we understand that soft demand at the Consumer segment, a high debt level and stiff competition from technology majors will continue to remain concerns, we feel that Dell will successfully capitalize on increasing IT expenditures and show top-line improvement.
Currently, Dell has a short-term Strong Buy recommendation, as indicated by the Zacks #1 Rank.
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