In the relatively short time since Dave Johnson left IBM Corp. to join Dell Inc. in late 2009, he's more than tripled the size of the company's M&A playbook. It now has well over 1,000 pages in nine different modules that the senior vice president of corporate strategy says relate to "different workloads in integration." The size of the rule book, and the focus on integration, speaks to Johnson's determination to beat the high odds of M&A failure that dogs megadeals in technology.
"Seventy percent of acquisitions theoretically don't work, and when they don't succeed it's usually around execution, not strategy," he says. "I believe an acquisition is like everything else we've learned in our careers, only it's everything at once."
Johnson, who spent 27 years with IBM and was one of its top M&A executives when he left, has had plenty of opportunities to put his Tolstoyan playbook to use. Over the past two years, he has initiated at least 11 deals, according to Dealogic -- six in 2010 and five last year. All of them are midsized companies for undisclosed terms, with two exceptions: the $955 million purchase of data storage company Compellent Technologies Inc. in December 2010 and the $610 million purchase of SecureWorks on Jan. 4 in 2011.
He says he prefers midsized deals because it's easier to grow a target's price-earnings ratio and profit margins more quickly by combining a target's product with Dell's vast global distribution network, among other advantages. But buying small takes more time to build scale, he admits -- a concern that has often spurred competitors toward bigger deals in the race to grab market share. It's this possibility that concerns some analysts, given that Dell has said acquisitions are important to its growth plans as it diversifies away from its traditional dependence on personal computers and toward higher-margin, faster-growing data storage, software and networking.
"It's a slow transition," says Michael Holt, technology analyst with Chicago-based Morningstar Inc., of this shift. "As an investor you want to see them moving toward higher-margin enterprise solutions, but not too quickly. The concern is if they move too quickly and overpay for an acquisition." Barclays Capital analysts also cite acquisition risk in their fourth-quarter analyst report. "We believe the biggest issues facing the stock include secular challenges in PCs, inconsistent margins and acquisition risk."
Johnson suggests he has no intention of rushing or doing a deal that hasn't made it through the filter of the playbook. Speaking with a noticeably measured voice, he says: "You have to have patience. Obviously, you have to do several of these [deals] to make it scale. But if you're willing to have the patience, the long-term value creation is much higher" than bigger acquisitions.
One of his aims in creating the playbook is to reduce what he calls the volatility of execution and make it user-friendly for anyone who gets involved in doing a deal in the company. For instance, the book lists all experts who worked on different aspects of every deal and their contact information. "It then very explicitly goes into what the product is that you need to develop and the outputs you need to generate and the governance process," he says. He also leaves plenty of room to document mistakes. "If we make a mistake, we instantly document that so we won't make it again. This helps on continuity and consistency."
So far, analysts have generally approved of Johnson's approach as he steers Dell toward higher-margin, faster-growing businesses. Robert Enderle, president and tech analyst at his eponymous firm in San Jose, Calif., says Johnson has "blossomed" at Dell. "At Dell, every significant acquisition [under Johnson] has been a success," he says. Importantly, Dell has made a point of giving companies they acquire a lot of independence. Johnson says this is key to the strategy and that he pairs every acquired CEO with a seasoned Dell executive to help with integration.
As for the year ahead, Johnson will continue to return frequently to his playbook. While the number of Dell deals dipped in 2011, Johnson remains in acquisition mode. The first deal this year has been AppAssure Software Inc., purchased in February for undisclosed terms. "While the number of deals went down [last year], I don't think that's indicative of the energy that we put into the process. It's more indicative of the numbers that pass through all our hurdles," Johnson says. "And I don't see our interest in considering nonorganic additions as changing in the near future."