In move to cater to the growing demand for high performance multimedia PC products, Dell on Wednesday announced plans to acquire high-end PC maker Alienware.
Recognized by Inc. 500 as one of the fastest growing private companies in the United States, Alienware is best known in the consumer market for its products’ appeal to video gamers. Terms of the planned purchase were not disclosed.
“Alienware’s products are an excellent complement to Dell’s own line of high-performance computers designed for gaming, enthusiast and media content customers. In addition to offering high-quality, high-performance products, Alienware has tremendous brand appeal with consumers and creative business professionals,” said Michael Dell, chairman.
Dell has not traditionally done acquisitions. In fact, Michael Dell has joked that the company acquires its competitors one customer at a time. But pressure from Wall Street could be changing Dell’s strategy.
“There’s this growing pile of cash on the balance sheet and Wall Street tends to be impatient with companies that don’t reinvest retained earnings because the theory is they can do better with the money if it were elsewhere,” Roger Kay, president of the market intelligence firm Endpoint Technologies, told the E-Commerce Times
With Dell’s slower growth in recent years, Kay suggested there may be an itching dilemma of what to do with the cash. One solution is to buy a profitable company with a promising future. Alienware fits that description, he said.
A Promising Future
Alienware had revenues of US$172 million in 2005. Its high-performance PCs sell for an average of $3,000 to $4,000 on the consumer side. Clients may also opt for models that costs thousands more.
“Alienware has very high margins. In terms of Dell recycling cash, if the company can buy an asset that is both higher growth and higher margin then that’s a good way to spend money,” Kay commented.
Alienware and Dell have compatible business models: both companies sell products directly to end users. They also have similar products. Alienware’s PCs are appeal to the same market as Dell’s XPS line.
“While Dell has not broken out the numbers directly, there’s some suspicion that its XPS sales haven’t been that great and that Alienware is another way to play the high-end gamer market,” Kay remarked. “The only issue is what Dell is going to do with its existing XPS line and how it is going to keep Alienware from crashing into XPS and vice versa.”
Alienware will operate as a wholly owned subsidiary following completion of the transaction and will maintain its own product development, product marketing, sales, technical support and other operations as well as brand. The management and founders of Alienware will continue to operate the company as a standalone unit of Dell.
“We believe that Alienware will realize significant advantages from Dell’s world-class supply chain and operational efficiencies. They will allow us to continue to satisfy our core customers with the most innovative and highest-performing PCs, and ultimately extend the reach and appeal of the Alienware brand,” said Nelson Gonzalez, who will remain CEO of Alienware.
A Merger-Filled Future?
Could there be more acquisitions down the line for Dell, a company that has in the past avoided mergers for the sake of its corporate culture? Dell has now opened Pandora’s Box, Kay said, and there is certainly less of an inhibition to acquire than there was before.
“Dell can’t say it doesn’t acquire companies anymore because clearly it does. So the question becomes what other companies might it acquire?” Kay noted. “This does open up a new avenue.”