Is Dell's acquisition of MessageOne really controversial?

In August 2005, ChangeWave Research found that 45% of individuals surveyed identified Dell as their vendor of choice for desktop systems - in February 2008, that figure had dropped to 32%. A similar decline has occurred in those identifying Dell as their preferred vendor for laptops. Not good news for one of the leading companies in the PC space.

In response, Dell has been moving into the services business, most recently through its $155 million acquisition of MessageOne, a provider of e-mail archiving, e-mail security, business continuity, emergency notification and emergency application failover services.

Interestingly, Dell’s purchase of MessageOne has been called “controversial.” For example, in an American Chronicle article in March, questions were raised about the purchase because Adam Dell, Michael Dell’s brother, owned MessageOne. The article stated, “Most business analysts are having a difficult time understanding how MessageOne…really fits into the Dell business scheme.” The article goes on to ask, “Was this really a smart business move on behalf of Dell, or was it simply a scheme to keep all the money in the family?”

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In August 2005, ChangeWave Research found that 45% of individuals surveyed identified Dell as their vendor of choice for desktop systems - in February 2008, that figure had dropped to 32%. A similar decline has occurred in those identifying Dell as their preferred vendor for laptops. Not good news for one of the leading companies in the PC space.

In response, Dell has been moving into the services business, most recently through its $155 million acquisition of MessageOne, a provider of e-mail archiving, e-mail security, business continuity, emergency notification and emergency application failover services.

Interestingly, Dell’s purchase of MessageOne has been called “controversial.” For example, in an American Chronicle article in March, questions were raised about the purchase because Adam Dell, Michael Dell’s brother, owned MessageOne. The article stated, “Most business analysts are having a difficult time understanding how MessageOne…really fits into the Dell business scheme.” The article goes on to ask, “Was this really a smart business move on behalf of Dell, or was it simply a scheme to keep all the money in the family?”

In my opinion, there is nothing at all controversial about the purchase. The $12 million earned by Adam Dell’s family is being donated to charity; his parents will earn about $500,000 (0.3% of the purchase price) from the sale. So much for the assumption that the deal was simply a gift from one family member to another.

On the contrary, I think Dell was smart to buy the company. Dell’s traditional core business has low margins and is increasingly competitive. It is fighting for market share among a large number of competitors. Low-cost PCs are becoming more popular. The world economy is slowing and sales of servers, PCs and other hardware are being delayed.

MessageOne’s core business, on the other hand, is growing very well. The e-mail archiving market is growing rapidly – our forecast calls for the market in North America to grow at the average annual rate of 36% through 2011. Emergency notification services are being increasingly adopted, as are security and business continuity services. Plus, the software-as-a-service model is gaining share for a wide range of applications.

The point of all this is not to defend or criticize anyone. Instead, the point is that struggling companies in low margin industries should look to strong growth markets and get into them, either organically or through acquisition.

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