Over the past 3-1/2 years that David Johnson has spearheaded corporate development at Dell Inc. , he has overseen a patchwork of 16 acquisitions, pretty much all of them in the middle market. The veteran dealmaker, who spent 27 years at IBM Corp. and eight of those as head of M&A, has rarely spent more than $1 billion to land a target since joining Dell in 2009. In fact, many of the deals have been so small the company hasn't disclosed terms.
Most have been targeted to advance Johnson's big ambition to diversify revenue away from the company's traditional dependence on the PC business, a sector that continues to drag on Dell's and other high-tech companies' results. Dell was smarting afresh last week after its fiscal third-quarter net income plunged 47%, hurt by weak demand for personal computers. Revenue from the PC business, which accounts for roughly half of sales, fell 19%.
Dell, well aware of the challenges it faces as consumers pile into smartphones and tablets, has been pushing hard to diversify its revenue base with new products and services. One of Dell's strategic goals is to use acquisitions and organic growth to create end-to-end IT infrastructures for enterprises of all sizes.
That's one of the reasons the company made a play for enterprise management software company Quest Software Inc. in June for $2.5 billion. The high price initially suggested that Johnson might finally be forsaking the middle-market path. In fact, some analysts feel it's just a matter of time before Dell starts splashing out on bigger game to accelerate market share growth, a suggestion that runs contrary to Johnson's stated goal of focusing on quick-hit margin growth opportunities through smaller deals. In a broad-ranging interview with The Daily Deal's senior editor Suzanne Miller, Johnson explains why the company remains committed to midsized deals, how Quest and other acquisitions have been fitting into the company's panoply of acquisitions the past few years and why revenue contribution matters a lot more than deal size when it comes to calculating his dollar's worth.
The crucial element in Johnson's grand acquisition strategy is integration -- harnessing the revenue base of smaller companies to Dell's sprawling global distribution machine -- and then mining the value of the assets and people at the companies he buys.
Some aspects of this process are unique, he admits, and require adaptability. But he's also a stickler for detail and standardized approaches -- much of which is outlined in an extensive M&A playbook that he's helped write and which runs more than 1,000 pages.
In the interview, Johnson shares his thoughts about integration, why he's willing to pay pricey premiums as needed to snag deals in higher-growth emerging sectors, why he's holding fast to the PC business and why he plans to remain an ardent serial acquirer in the months ahead.
The Daily Deal: Earlier this year, you talked about your commitment to midsize deals. You've since made two significant acquisitions. Is this a shift in your strategy?
Dave Johnson: We don't think this is really a shift in our strategy. When I talk about midsize deals, I'm really talking about the size of revenue, principally, that that company has. So, the sweet spot is really somewhere, I'd say, between 100 million of revenue and, on the high end, probably a billion dollars of revenue. Those companies are big enough that they have some scale but not yet globalized efficiently. So, we can leverage Dell's brand, strong customer base and partnership to accelerate their expansion on a global basis. So, we think both Quest and SoniQual represent perfect examples of midmarket opportunities for us in our acquisitions.
What makes a large acquisition like Quest a midsize acquisition?
Johnson: As we look to increase shareholder value for our Dell investors, it's a lot about how we can take these good products and expand them in terms of either customer breadth or geographic breadth, which is also customers. So take Quest, as you're saying. Quest has a strong presence in the U.S. and even in Europe but a very low presence in Asia-Pacific. So, we'll be able to take our Dell distribution capabilities, both with our partners and our direct channel, and enable Quest to more rapidly expand their capability in that geography.
How fast do you expect to be able to realize your return on this investment? Are you buying around and leveraging around scale? I would imagine this makes that process that much faster for you.
Johnson: Absolutely. I mean all of our acquisitions we target for material return for our shareholders are above our cost of capital. Quest is just another example of that. And it's these types of synergies that we can bring where we acquire very strong product portfolios and leverage the Dell brand and distribution capability to accelerate their growth. And it's through that acceleration of growth that we really optimize our returns. That's true on all Dell acquisitions. Our acquisitions are not geared toward cost and expense consolidation. Nothing against those, that's just not consistent with our strategy. Our strategy is really to leverage and help our customers with today's problems. That's not really around cost and expense. That's much more around what's happening in our industry, helping them take advantage of evolving technologies to address their problems.
Is there a time frame that you target for the return that you're seeking for an acquisition, say within a year? Or is that really specific to the transaction?
Johnson: Well, clearly, each one's a bit unique, as you'd expect. To have a return on the amount of invested capital in a year is probably not realistic. We are definitely looking for long-term opportunities to increase shareholder value. So, it's not just the immediate returns. It's really looking for acquisitions that we can sustain rapid growth for the foreseeable future. So, these are multiyear investments. The acquisition itself is just a piece of our investment. On average, over the course of the first 12 months, we'll often double the size of the sales team and the development team. If you look at our entire portfolio last year, we increased the investment by 70% across the entire portfolio against those two critical skill groups. That just aligns with our efforts to ensure that we're optimizing long-term growth.
Let's talk about the PC business. Hewlett Packard CEO Meg Whitman recently talked about the need to revivify their PC business and that they essentially needed to make their PCs and laptops more beautiful, more aesthetically pleasing. How do you see the PC business evolving since it is a stagnating part for many right now?
Johnson: I think Meg is addressing one important element around these endpoint devices, whether they be smartphones, tablets, notebooks or desktops. If you look at all those endpoint devices, the challenge that many companies today are facing is the bring-your-own-device-to-work, or said another way, the heterogeneous nature of these devices, which is very different and is adding all kinds of complexity. So, one of the big initiatives under Dell is how do we help our customers deal with that in a secure, connected way. So, many of the investments we've made both organically and inorganically now position us to help the chief investment officer deal with that challenge in their environment today. So, we have the most comprehensive set of security offerings, manageability and actually networking for those devices in the industry today.
So the PC is not going away. You're not going to siphon that part of your business off?
Johnson: Look, it's a major workload. All CIOs will migrate into thinking around applications and workloads, given what's happening in the enterprise. This is one major work stream, it's a really important work stream and I think we're well positioned to help our customers deal with the shifts that are happening in that segment.
So you feel that that is part of your business that has the potential to gain traction and growth?
Johnson: Absolutely. You need to expand your thought around that, not just to the device, but to the software and services around managing that entire environment. That's what we are really doing to help the customer migrate.
If I step back for a minute and you think about the complexity of being a CIO today, one of the areas that used to be fairly simple was they could have a consistent image in their enterprise and in essence relegate the acquisition of those devices to somebody within their organization. But with the advent of today's workforce and the bringing of your devices to work, the manageability and the security of those has become exceptionally difficult.
So, it's risen to the top of the agenda of the CIO. There isn't a CIO I call on where they don't ask me this question. I think this is really good for Dell because as that issue is elevated back to the CIO, it's a place where we have, from an historic perspective, permission to really help them solve the entire problem.
So, we can go in, in a consultative engagement and talk to them about where they need smart devices or thin devices, the best pace to manage that, whether it's off of their network for the smart devices or in some sort of cloud environment for their thin devices and how to connect all of this in the fastest, flattest manner possible to simplify this part of the problem again.
You've been busy buying software, storage and networking equipment assets and moving more deeply into the enterprise market. Can you talk about where you are and where you still need to get to?
Johnson: That's a great question -- one I often get -- which is how do these acquisitions all link up? Acquisitions are something that you use to help implement a strategy. You start with a strategy of where is it that you want to go as a company. Then you ensure that organically and inorganically you're making your investments to line up with that. So, if I categorize these, we've already talked about one. These industry pressures that are really complicating how you manage your endpoints is a big place where we've focused our acquisitions. So for example, if you look at Wise or Case or SoniQual or SecureWorks or the identity and access management part of SecureWorks, these are all examples ... of how you manage, secure and connect your endpoint devices. So, that's clearly one focal point of our strategy -- to help solve that problem.
Another huge challenge for our customers is the incredible productivity opportunity in their core data center. The challenge is to migrate from the current environment to the beauty of that agile and efficient architecture that's emerged today. So, a whole other set of our investments have been around that: How do you move from legacy environments to industry standard environments? Acquisitions like Make and Clarity and Boomy and even application migration suites within Quest enable us to help our customers capitalize on the opportunity to really more efficiently manage their data center.
Then lastly, there is a move back to applications. The difference between on- and off-premise computing from cost and ease of use will merge. As that happens, you'll now think about your applications and which ones do you want to put on-premise versus off? What importance is performance or latency? Is that data something you're comfortable having off-premise? Are there regulations that you must address that will influence your comfort level of having that off-premise?
And even what I call transparency. Do you have the visibility into the performance of the application so that if it were to go down, you could react quickly enough so that you don't have some sort of significant impact on your business? For these and other reasons, people will reorganize their data center around applications and decide which ones they want to put on-premise versus off-premise.
Well, to do that you go back to vertical management. So, the converged infrastructure is going to be a huge piece of the future market, whether that's in a private cloud or a public cloud environment. So, there's a host of acquisitions, I think 19 over the last three years in that space, to allow us to have unified storage, complete networking and levels of software up there that allow you to automate and orchestrate all of the infrastructure within that rack or blade -- meaning the network, the compute and the unified storage. So, we're really well positioned to help our customers as they move to this application-based approach to really not only consult with them and advise them on how to design this, but actually to provide the core infrastructure that they need.
Are you where you need to be right now? Are you planning more acquisitions around that area of your product offering?
Johnson: There's two ways to answer this question. Are we completely done? No. I mean, there are a couple of gaps that we're still looking to fill. But the reality is, I think there'll always be gaps. I've been in the industry for 30 years now and the pace of change just continues to accelerate. I expect that to continue. So, whether it's Dell or any company, your ability to do all of that internally is unlikely. You need to have the opportunity to complement your organic activities with nonorganic acquisitions to meet your customers' needs. At the end of the day, it's all who can help their customer meet their needs the best. If you have to use acquisitions to do that, that has to be a part of your capabilities and approach.
Some analysts have worried that you can't grow market share fast enough without bigger acquisitions. What are your thoughts about achieving critical mass as you compete in fast-growing segments of new businesses?
Johnson: The way you really increase shareholder value is around the post-acquisition growth rate that you're able to sustain. So, you have a choice. You can buy a couple of large companies and try to integrate those. Or if you're really good, you can serially acquire many midsize companies. In reality, it's much easier, for the reasons we were discussing earlier around global leverage of these, to grow midsize companies more rapidly than large ones. Quite frankly, Dell has more to offer a midsize company than a very large one. So, we've made the investments to really be a serial acquirer of several midsize companies as opposed to a few large companies. We think that the benefits to our customers and to our shareholders is better.
That takes me to another question, how you orient your team and integration. How many people are on your team, how is it organized? Do you have a dedicated group that focuses on integration?
Johnson: I'm a firm believer in an end-to-end process. So, within my organization we have strategy, M&A execution and integration responsibilities. The buck sort of stops in one place, you've got to make sure the strategy is right. You've got to make sure you execute well. Then you have to spend a lot of time managing the integration to optimize that return not only for our shareholders, but for the employees that are now joining you as new teammates.
Overall, we have about 200 people that are dedicated to acquisitions in every single function. That's fabulous because like everything else, we all learn. So, if your whole job is helping one company after another assimilate efficiently and effectively into Dell, well, you get better and better at it. So, we have a consistent set of resources and a consistent approach to doing that.
Now, every acquisition, as you know, is different. So, we really step back and try to assess the value drivers. Simply stated, that's to answer the question, why did you buy the company? What were the unique things that attracted you to that company? Well, you ought to preserve those qualities, right?
So, you start with those tenets and do unique things for that, but most of the rest is standardized. As I've spoken with you previously, we have a very comprehensive set of playbooks that we use in order to have consistency of execution. Those are rolled out across all of the business unique within Dell. So, we abide by those tenants but apply them specifically to each acquisition to optimize their performance.
As we expand our capabilities, there are wonderful opportunities for the leadership teams of these acquired companies because they assume that responsibility now inside of Dell. So, these are as much about the people that we're bringing in for Dell as it is about the assets and intellectual property that we're bringing in. We try to leverage both aspects of this and develop our integration plans and policies to try to optimize on all those fronts. From a governance perspective, I have regular sessions with all the acquisitions that I can only best describe as operational reviews. Before we acquire a company, we build a very extensive integration or operational plan. But like all things, you have to be prepared to monitor its progress and make modifications as necessary to help them be successful.
Do you match senior members of the Dell team to senior members of the acquired company?
Johnson: That's an excellent question. I mean there's no substitute for good leadership. So, as much as we have a comprehensive set of processes, resources and tools to help them, there absolutely is no substitute for what you're describing. Do we have a leader that's paired up? We do. We have two in a box in essence where we put a very capable Dell executive with the acquired CEO. The acquired CEO obviously knows their business better. The Dell integration executive knows Dell better. Together, they can enable them to be successful inside Dell. In essence, you've got the CEO of the acquired company that says this is what I want to accomplish. So this is sharing the best of both worlds, what the company understands around their products and their marketplace with the Dell executive helping them to facilitate that within our infrastructure.
What are you seeing this year on deal valuations versus a year ago and how is that affecting the competition for deals you're interested in doing?
Johnson: There's really a bifurcation happening. Or said another way, there's an incredible premium, greater than I ever remember for growth potential. So, if the company has extraordinary growth potential we're seeing multiples that you and I haven't seen historically. On the other hand, if they're traditional businesses, that's not the case. So, that's why I say there's more of a bifurcation in the purchase prices between these. Dell is doing some of both, quite frankly. There's some core capabilities that we need where we're able to get what you would think is a relatively good price and then there's places where we're really buying into the next generation emerging technologies where we're having to pay substantial premiums in order to get them. So, I think this is happening and it comes down to, again, our ability to dramatically moderate or increase the rate of growth of these companies that are already on in order to pay these prices.
How are you gauging the growth potential versus the premium tradeoff when you're going in and assessing deals? I would imagine that the metrics you're using are shifting a bit as the premiums are really increasing dramatically.
Johnson: I think actually not. We're still going through all the same fundamentals of building an operational plan that we believe we can execute on and a business case to support that. Does that business case allow for the Dell shareholder and adequate return? So, that's all being applied. If you're going to pay for an emerging growth asset at these types of prices, you've got to have a very solid operational and integration plan and have a lot of confidence that you can execute on it.
So, I think this is putting pressure on companies to really address the hardest part of an acquisition, which is the integration both in terms of the operational, the cultural, the leadership, all the things that go into that. As we all know, integration is difficult because you're bringing all aspects of a business in simultaneously. All of these skills we have in our company. It's just applying them all simultaneously that is a different challenge within integration. That's why I believe having a dedicated, committed integration team is just paramount to being a serial acquirer.
You spent 27 years at IBM , which is also a known serial acquirer. How are you adapting what you did there -- your style -- to where you are now, joining Dell in 2009?
Johnson: Yes, it's almost 3-1/2 years ago that I joined Dell. Time is moving fast, no question. The one thing that I would say that I really brought with me is just a very broad enterprise perspective. I mean after 27 years in a host of different business segments and different roles you acquire a real strong knowledge around how the enterprise works, their nature and a very customer-centric understanding. So, I think that's one of the things that I've brought with me to Dell -- a broad understanding of the enterprise. That's helped us.
But clearly, Dell's a different company. It has different assets. Like any good strategy, you're trying to understand both where the industry is going but also what assets you have to build with and trying to marry those together to see the intersection of where opportunity overlaps with capability. That's unique for every company.
So, that's what I've been working on, helping Dell find where those overlaps are. For example, when we talked about an ability to manage, secure and connect all these heterogeneous devices, well, the permission and knowledge that Dell has around these devices is great. But you're starting to now marry that with the enterprise aspects around manageability, security, and so there is a case where you're bringing both together -- some through an acquisition to expand our capabilities, but clearly leveraging Dell's historical brand and their strength.
You've had a busy 2012. There's still a little bit left to the year. Are you going to take a break? What does 2013 hold?
Johnson: The market continues to move. Again, we're blessed to be in an industry that changes, that gives you incredible opportunities to gain market presence. So, we're not done. I mean even if we were done for what we want to do today, there are new things coming. So I think you will see Dell remain, both this year and into the future, a serial acquirer to complement our capabilities and to meet our customers' needs.
Schulte Roth & Zabel LLP's activist defender David Rosewater switches sides and joins Morgan Stanley. For other updates launch today's Movers & shakers slideshow.
Fiat Chrysler, eager for a deal, can′t seem to entice a buyer for itself, and its CEO Sergio Marchionne is having a difficult time convincing his industry there is a need for consolidation. More video