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June 16, 2012

Michael Dell Demonstrates Desperation, Inexperience in Decision to Acquire Quest Software


Ordinarily, I couldn't be bothered about some petty $B transaction, but since this impacts our global customer base as well, its worth taking a few minutes to shed light on.

This weekend, two companies, Dell and Quest Software are reportedly in talks to close an acquisition deal valued at $ 2.15 B.

For those not in the know, Quest Software recently decided to play high-stakes poker by involving their friend “Insight Ventures” to create a window-of-opportunity for potential acquirers to engage in a bidding war. By setting a base price of US $2B, they ensured that any offer made would exceed that unearthly amount (50x 2011 earnings!)

As I had predicted, no company other than Dell ended up making a matching offer, in all likelihood, because they know Quest is not worth $2B.

However, fortunately for Quest Software, Dell’s been having a pathetic few quarters, so the need to demonstrate to shareholders that something is being done to alleviate the situation, drove Dell to make a desperate offer of a whopping $2.15 B for Quest Software this weekend.

Dell’s shareholders should be worried.

Quest Software made $40M in earnings last year. At that rate, it would take Dell 50 years to get back just their investment. Even if they magically doubled Quest’s earnings, it would still take 25 years to get to that point.

How this acquisition will result in any net profit for Dell is unfathomable. Other than to boast of an enhanced software portfolio, at an exorbitant cost, and possibly demonstrate some progress to gullible shareholders, this is a losing proposition for Dell.

The funniest thing here is Quest Software’s existing investors suing Quest saying that the offer’s too low. They’re living in dreamland. Quest is not worth more than $1B by any reasonable standards, so they’re already getting an awesome deal. For them to think that a $2 B valuation is low, is for them to demonstrate being completely out of touch with reality.

But then, it’s a free market, you can’t stop gullible investors from making foolish moves. Some of us intimately cognizant of the landscape, are amused at Quest’s dabbles in high-stakes poker and Dell’s inexperience.

The only losers here seem to be J.P. Morgan Chase, RBC Capital Markets, Barclays Capital, and Vector Capital, each of whom Insight Ventures, a good friend of Quest Software, seem to have somehow convinced that Quest is worth $ 2B (i.e. even with 2011 net earnings being a petty $40M), so they could partake in footing the majority of the bill to take Quest Software private.

That’s all the time I have for this. Now if you’ll excuse me, we’ll go help organizations worldwide with mission-critical solutions to challenges the Quests and Dells of the world haven't the faintest idea how to solve!


July 02, 2012 update: Dell Acquires Quest Software