FAQ: What the Dell-Perot merger means for the IT industry

Dell on Monday announced a definitive agreement to purchase Perot Systems, the IT services company founded by Ross Perot in 1988. The acquisition, expected to close between November and January, greatly expands Dell's reach into the IT services and support market, particularly in government and healthcare sectors. Dell is paying $3.9 billion for Perot Systems, a 68% premium over Perot's actual stock value. Here's a look at some of the key questions related to the deal.

Why does Dell think Perot is worth such a high price? The 2007 hiring of Stephen Schuckenbrock, former COO at Electronic Data Systems, was one of several moves signaling Dell's intent to move further into the services industry. Buying Perot is part of Dell's plan to expand its footprint in the IT services market, which may be a necessity in a time when hardware sales are falling. But the Perot deal is the strongest step yet in this regard. "Over the last couple of years they have more or less created a platform for a true entrance into the service market," says Forrester analyst Paul Roehrig. "They're really over-exposed on the hardware side. "In a lot of ways, this is a natural extension of the trajectory they have been on." (Read what analysts have to say about the acquisition.) The Obama administration's attempt to expand federally funded healthcare coverage is another consideration. By purchasing Perot, Dell immediately expands its penetration into both markets, which are likely to grow, Roehrig says. "If you were betting a couple billion dollars, what industry would you bet on?" he says. "In North America and globally there's a lot of technology enablement that has to happen in those spaces." Dell officials said they are also seeing demand from customers who want to virtualize their data centers and build private cloud networks, and buying Perot will significantly bolster Dell's ability to serve those customers. Nearly half (48%) of Perot's revenue comes from the healthcare industry, and 25% of Perot's revenue comes from the government sector.

How will Perot be operated within Dell? Dell said it will combine its own services organization with Perot's. The operation will be run out of Plano, Tex., Perot's corporate headquarters, and will be led by Peter Altabef, Perot's CEO. Dell has pulled in $5.1 billion in services revenue over the last year, while Perot did $2.6 billion in business, so the combined services organization has annual revenue of nearly $8 billion. Perot Systems will become the focus of Dell's services business. What will happen to Perot's employees and leadership team? Dell officials say they expect to cut $300 million in costs out of the two companies over the next two years. As with any acquisition, there will likely be layoffs to reduce overlap between the two companies.

Top executives are staying put, with Dell saying it has reached "long-term retention agreements" with both Altobef and "critical members of his senior leadership team." Perot has 23,000 employees. The 79-year-old Perot has served as chairman emeritus of the company's board since September 2004. Perot, a former presidential candidate and a major figure in the IT services industry for nearly five decades, is also the founder of Electronic Data Systems, which was purchased by HP. (Slideshow: Techies turned politicians)  Perot's son, Ross Perot, Jr., is a former CEO of Perot Systems and is now chairman of the Perot board of directors. Is Ross Perot still involved in Perot Systems? Perot, Jr. will be considered for appointment to the Dell board after the acquisition closes, according to Dell. The acquisition "definitely makes a statement," says Gartner analyst Dane Anderson, and gives Dell new expertise in the healthcare and government markets.

Should competitors in the IT services industry be worried by the Dell-Perot combination? But the merger is not a guarantee of success. "Whether they suddenly become the next big competitor to IBM, Accenture, or HP EDS, that remains to be seen," he says. HP, having purchased EDS, does $40 billion in services revenue, Anderson says. Size-wise, Dell's services organization still pales in comparison to some competitors. IBM is even bigger with $57 billion in services revenue.

Yes, but which company might get acquired next is anyone's guess, Anderson says. With EDS and Perot now off the block, are there any other IT services firms that might be acquired? Companies like CSC and Accenture could be takeover targets, but the same could be said of numerous services vendors. "The reality is, I'm not sure anyone is out of play," Anderson says. "The issue is who has got the intestinal fortitude and cash to make things happen." HP and IBM obviously have the cash. You really have to find a way to create volume in those smaller deal sizes." Can we expect Dell to make more acquisitions? But HP already acquired EDS, and IBM has such a large services organization that further growth will be difficult to achieve. "I don't think IBM will acquire a big services company, but it's not necessarily ruled out," Anderson says. "IBM already has $57 billion, $58 billion in services revenue, so how do you grow that effectively, especially when there are many fewer billion-dollar plus deals out there? Yes.

Should Dell and Perot customers have any concerns about the merger? Dell was able to expand its ISCSI storage business last year by purchasing EqualLogic and has indicated a willingness to continue expansion through acquisition. "We're looking for more things like EqualLogic which build on strong IP and allow us to extend the significant customer reach we have," Michael Dell, chairman and CEO of the company, said in a conference call Monday. Customers should always examine the potential ramifications of an acquisition, analysts say. But on balance, customers have reason to expect that the Dell-Perot combination will provide new opportunities or at least not be harmful. "With these kinds of integrations, clients get nervous," Roehrig says. One question is whether Dell will pressure clients to use Dell hardware rather than servers and storage from Sun, HP or others.

But "customers shouldn't panic about this. In fact, they should look at it as an opportunity to see if it remains a good fit and see if they can generate additional value for their own firms based on [the combination of Dell and Perot]." Customers of service companies that have close partnerships with Dell's hardware division may have reason to be nervous, however. "If my service provider is really relying on Dell, that's something I'd worry about," Roehrig says.

Microsoft denies it built 'backdoor' in Windows 7

Microsoft today denied that it has built a backdoor into Windows 7, a concern that surfaced yesterday after a senior National Security Agency (NSA) official testified before Congress that the agency had worked on the operating system. "Microsoft has not and will not put 'backdoors' into Windows," a company spokeswoman said, reacting to a Computerworld story Wednesday. Yesterday, he raised the issue, which isn't new, of whether the NSA pressures companies like Microsoft to craft so-called "backdoors" into their code that would let the agency track users and intercept users' communications. On Monday, Richard Schaeffer, the NSA's information assurance director, told the Senate's Subcommittee on Terrorism and Homeland Security that the agency had partnered with the developer during the creation of Windows 7 "to enhance Microsoft's operating system security guide." Echoing earlier concerns, Marc Rotenberg, the executive director of the Electronics Privacy Information Center (EPIC), questioned the wisdom of letting the NSA participate in OS development. "The key problem is that NSA has a dual mission, COMPUSEC, computer security, now called cyber security, and SIGINT, signals intelligence, in other words surveillance," Rotenberg said in an e-mail.

Rotenberg called it an "obvious concern," and added that it might be difficult for major software makers to turn down NSA "suggestions" because the U.S. federal government is an important customer. The company rolled out the Windows 7 version of the toolkit late last month, shortly after it officially launched the operating system. Today's categorical denial by Microsoft was accompanied by further explanation of exactly how the NSA participated in the making of Windows 7. "The work being discussed here is purely in conjunction with our Security Compliance Management Toolkit," said the spokeswoman. The compliance management toolkit provides a set of security configurations that address additional levels of risks beyond those addressed out of the box, as well as tools to deploy these configurations and monitor what Microsoft calls "configuration drift." The toolkit is aimed at enterprises, government agencies and other large-scale organizations. John Pescatore, an analyst with Gartner Research, agreed. "[The concerns] are way overstated," he said today in an e-mail. "NSA worked with Microsoft and others, like Cisco, on security configuration standards for [their] products." Cisco, in fact, has built "lawful intercept" capabilities into its products, including its Internetworking Operating System (ISO) and its VoIP (Voice over Internet Protocol) lines. Microsoft's rejection of the idea that it's hidden a backdoor in Windows came as no surprise to security researchers, who yesterday expressed doubt that the company would put its reputation at such risk. "I can't imagine NSA and Microsoft would do anything deliberate, because the repercussions would be enormous if they got caught," Roger Thompson, the chief research officer of antivirus vendor AVG Technologies, said yesterday.

The term describes the process by which law enforcement agencies conduct electronic surveillance of circuit and packet-mode communications under authorization, such as electronic wiretap orders. The NSA proposal, however, raised a firestorm of protest and the idea was ultimately dropped. Rotenberg still questioned NSA involvement. "The key point is that the NSA is not the right agency to promote computer security in the private sector," he argued. "The risks to end users are real - the original NSA key escrow proposal, 'Clipper,' was a terrible idea - and there is too little transparency about these arrangements." The Clipper chip Rotenberg referred to was a project first proposed in 1993 that would offer ultra-strong encryption, but would allow access to encrypted data by law enforcement.

NASA probe crashes into moon in hunt for water

In its search for water on the moon, NASA slammed not one, but two, spacecraft into a deep, dark crater on the lunar south pole this morning. NASA successfully nailed a target about 230,000 miles from Earth - twice. It was a precision operation.

The Lunar Crater Observation and Sensing Satellite, known as LCROSS, separated into two sections last night. Four minutes later, the rest of the space probe shot through the miles-high plume of debris kicked up by the first impact, grabbed analysis of the matter, and then it too crashed into the lunar surface. Its empty rocket hull, weighing in at more than 2 tons, was the first of the two pieces to slam into the lunar surface at 7:31 a.m. EDT today. Effectively, it was a one-two punch designed to kick up what scientists believe is water ice hiding in the bottom of a permanently dark crater. NASA said it will issue a report on its initial analysis of the probe at10 a.m. EDT today. With NASA still hopeful to one day create a viable human outpost on the moon , it would be helpful for anyone there to find water rather than haul it up from Earth.

NASA had been promising live images of the impact and resulting debris plume but the live images on NASA TV disappeared moments before impact. The orbiter is expected to send its own analysis of the debris plume back to earth later this morning. The LCROSS spacecraft, which blasted off from Cape Canaveral Air Force Station in Florida on June 18, went aloft with its companion satellite, the Lunar Reconnaissance Orbiter . As the Atlas V rocket carrying lifted off, a NASA spokesman called it "NASA's first step in a lasting return to the moon." NASA's Lunar Reconnaissance Orbiter , which has been in orbit around the moon since late June, was 50 kilometers above the moon's surface during this morning's impact. The LCROSS spacecraft heavily loaded with scientific gear. The instruments were selected to provide mission scientists with multiple views of the debris created by the hull's initial impact. According to NASA, its payload consisted of two near-infrared spectrometers, a visible light spectrometer, two mid-infrared cameras, two near-infrared cameras, a visible camera and a visible radiometer.

Before it crashed into the moon, LCROSS was transmitting data back to NASA mission control at 1.5 Mbps, NASA noted this morning.

NASA facing game-changing times

When NASA Administrator Charles Bolden releases the space agency's fiscal year 2011 budget this week it will likely the beginning of a startling new phase of space research and activities. NASA telescopes watch cosmic violence, mysteries unravel That was the conclusion of the Augustine Review of United States Human Space Flight Plan Committee report delivered to the White House last October. When it comes down to it, NASA is the most accomplished space organization in the world but its human spaceflight activities are at a tipping point, primarily due to a mismatch of goals and money.

The report said NASA's fundamental conundrum is that within the current structure of the budget, NASA essentially has the resources either to build a major new system or to operate one, but not to do both. According to the GAO, NASA estimates that Ares I and Orion represent up to $49 billion of the over $97 billion estimated to be spent on the Constellation program through 2020. However, the Constellation program has encountered daunting challenges in terms of design, testing, manufacturing, and poorly phased funding that have led the program to slip its target for a first crewed flight to no later than March 2015.While the agency has already obligated more than $10 billion in contracts, at this point NASA does not know how much Ares I and Orion will ultimately cost, and will not know until technical and design challenges have been addressed, the GAO stated. Money is a problem especially when it comes to NASA's biggest expenditure: the Ares rocket. And indeed it likely won't. But what will NASA do? For example the action most likely to generate the most attention this week will be the directive to move forward aggressively with a commercial launch of crews to low-Earth orbit. There are a ton of possibilities and projects.

NASA will be part of the support of some of these missions but such services should be a boon to many US aerospace companies. If humans are ever to live for long periods on another planetary surface, it is likely to be on Mars, the commission stated. The aerospace consultancy Futron said that as much as $1.5 billion may be up for grabs for commercial space operations in the next ten years. 7 critical commercial spaceflight concerns the US must tackle It will be interesting to see what happens with Mars, as the Augustine commission said Mars is the ultimate destination for human exploration. Here are just of few of the other hot topics that likely will make more news this week: How will NASA defend Earth against killer asteroids and comets? The report says the $4 million the US currently spends annually to search for comets and asteroids is insufficient and that while impacts by large comets or asteroids are rare, "a single impact could inflict extreme damage, raising the classic problem of how to confront a possibility that is both very rare and very important.

The National Research Council recently said NASA doesn't get enough money to properly track all of the asteroids and comets that head toward Earth, a task it is required to handle by Congress. Far more likely are those impacts that cause only moderate damage and few fatalities." NASA space shuttle Endeavour rockets onNASA gave its space shuttle Endeavour a thumbs up this week for an expected nighttime launch on Feb. 7. According to NASA at this point there are no issues that could impede an on-time liftoff of Endeavour and for the for the space shuttle program's 32nd visit to the International Space Station. Five shuttle missions are planned in 2010, with the final flight currently targeted for launch in September. Endeavour's flight will begin the final year of space shuttle operations. NASA hears nothing from Mars Phoenix roverSo far it looks like the outside chance that NASA's frozen Phoenix Mars Lander is still alive is - way outside. Nineteen more listening overflights are planned this month and more in February and March.

The space agency said this week that its Mars Odyssey orbiter flew over the lander 11 times between Jan. 19 and 20, without hearing anything from Phoenix. NASA wants your Mars photo target ideasNASA recently said it would begin soliciting public photo shoot suggestions for the cutting edge camera onboard its Mars Reconnaissance Orbiter. NASA said the orbiter's High Resolution Imaging Science Experiment camera, or HiRISE, is the most powerful camera ever to orbit another planet. And it's no ordinary camera. NASA test drives all-composite prototype spacecraftWith an eye toward building safer, lighter and tougher spacecraft, NASA said its prototype space crew module made up of composite materials handled tests simulating structural stresses of launch and atmospheric reentry.

Verizon launches electric grid reliability consulting

Verizon Business today launched a set of consulting services specifically designed for electric utilities working to safeguard the reliability of the electric grid in North America. The consulting services could cost from $30,000 to multiple millions of dollars, depending on the size of the utility and its needs, said Omar Khawaja, product manager at Verizon Business, a division of Verizon Communications Inc. Among the services Verizon will offer is advice on, and implementation of, security software that can be used to thwart cyberattacks on the electric grid. Khawaja said the average consulting services contract would cost between $50,000 and $200,000. Verizon already provides security consulting to hundreds of companies and has many electric utilities under contract.

NERC was empowered by the U.S. 2005 Energy Law to enforce the NERC CIP standards; NERC is overseen by the Federal Energy Regulatory Commission (FERC). Verizon will be competing with international accounting firms that provide similar utility audits and the consulting services of IBM Corp., Khawaja said. The new services are intended to specifically help electric utilities meet a July 1, 2010 deadline to be "auditably compliant" with the North American Electric Reliability Corp.'s Critical Instruction Protection (NERC CIP) requirements, Khawaja said in an interview. "Auditably compliant" means that electric utilities must be able to show an auditor that the utility has logs and other records indicating it has 12 months of compliance with the requirements. However, Verizon's familiarity with communications networks gives it more expertise in dealing with electric networks, which could give it an edge. The smart grid concept is designed to help utilities conserve energy and costs, partly by allowing utilities to communicate with a variety of devices on a grid about the real-time cost of electricity. In addition, smart electric grids of the future will involve two-way communications using Internet Protocol controls that are part of Verizon's expertise, Khawaja added. For example, a dishwasher or electric car might have an automatic two-way communication with the electric utility about what time of day energy is less expensive.

The data passed over IP could be communicated via existing wired infrastructure or even wirelessly, Khawaja said, but there is also developing technology that allows data to be carried over electric lines. The car or dishwasher would shut down until a time when costs were lower, Khawaja said. With such smart grids, utilities will need cyber security protection against fraud by homeowners and average consumers trying to keep their electric bills low, as well as against international terrorists who might want to cripple the grid as part of a larger attack, Khawaja said. "IP is a well-known protocol, so there is potential for security breaches and the amount of threats is much greater now." The CIP regulations will also protect electric utilities against accidents or natural disasters. Utilities must meet eight NERC CIP requirements, including identification of cyber assets in the grid, adequate training for personnel and the physical security of computer assets. Verizon will offer four basic types of consulting, starting with strategy, then planning, implementation (including installation of patch management technology) and security operations. The CIP requirements also detail how cyberattacks must be reported and lay out plans for recovery in the event of an attack or accident.

Start-up unveils storage platform for large-scale Web applications

A storage company emerged from stealth mode this week with software designed to efficiently manage the file serving needs of Internet applications such as social networks, online ad serving and software-as-a-service.  Nine data storage companies to watch MaxiScale announced the Flex Software Platform, which is installed on commodity gear, such as a bank of Apache Web servers. Retrieving a small file with the MaxiScale system requires just one I/O operation, a feature that eliminates bottlenecks caused by systems that require multiple I/O operations for each small file retrieval, says IDC storage analyst Noemi Greyzdorf. "They built a very interesting file system that handles small files – files that are one megabyte or smaller – incredibly efficiently," Greyzdorf says Configurations start with as few as four nodes but can scale up to 50,000 servers, the company says. The goal is to improve performance and reduce cost, space and power requirements for Web companies that have to deal with large numbers of small files. "We think people deploying Web applications have been paying too much money and we're out to change that," says Gary Orenstein, vice president of marketing for MaxiScale. Instead of using expensive storage boxes with interconnects like InfiniBand or Fibre Channel, MaxiScale recommends using Flex with 2TB SATA drives and says the Flex system relies on IP and Ethernet connections. "We're using standards-based, commodity hardware for everything," Orenstein says.

Maxiscale's first publicly named customer is AdMob, a mobile advertising marketplace that has served more than 110 billion ad impressions in the last three years. Flex uses a patent-pending Peer Set architecture that replicates file data and metadata across SATA drives, allowing for load balancing and resiliency to multiple hardware failures. Based in Sunnyvale, Calif., and founded in 2007, MaxiScale has $17 million in venture financing from investors NEA, El Dorado Ventures and Silicon Valley Bank. Flex software is available now and pricing starts at $6,000 for four nodes allowing up to 32TB of storage. MaxiScale was co-founded by CEO Gianluca Rattazzi, who previously founded Meridian Data, Parallan, P-Com and BlueArc; and CTO Francesco Lacapra, who previously held executive roles at Olivetti, Quantum and BlueArc. Follow Jon Brodkin on Twitter.

Broadcom buying Dune Networks for cloud switching

Broadcom has agreed to acquire Dune Networks, a privately held maker of high-speed switch fabrics, for about US$178 million, the companies announced Monday. Its SAND switch fabric can scale up from 10G bps (bits per second) to 100Tbps in total capacity and support individual ports with speeds up to 100-Gigabit Ethernet, according to the company's Web site. Dune was founded in 2000 and sells chipsets for high-capacity network equipment.

It is designed as the heart of switches for data centers, enterprises LANs, and carrier core and edge routers and Carrier Ethernet platforms. By bolstering the company's lineup for data-center networking gear, it will help to meet growing demands for cloud computing infrastructure, Broadcom said. The acquisition, which is expected to close before the end of Broadcom's first quarter ending March 31, 2010, adds another piece to Broadcom's extensive communications chip arsenal. Broadcom will pay mostly cash for Dune, which is based in Sunnyvale, California, and Yakum, Israel. Dune's approximately 100 employees will be integrated into Broadcom's Network Switching Business Unit and the company's main research facility will remain in Israel, said Martin Lund, vice president and general manager of the unit.

The boards of both companies have approved the deal, but it is subject to customary closing conditions. Lund said current Dune CEO Eyal Dagan would report to him. Broadcom acquired another switch fabric maker, Sandburst, in 2006. It plans to keep the XGS Core architecture that came from Sandburst, which is well-suited to metro Ethernet and carrier applications, while turning to Dune to meet the growing demand for switches in massive data centers, Lund said. "The strategic importance of cloud computing, going forward, is so great that we want to make sure we have the best architecture for that," Lund said. Broadcom is based in Irvine, California, but also has facilities in Silicon Valley. For companies building big data centers, Dune's acquisition by Broadcom could eventually mean less expensive network equipment, according to Linley Group analyst Jag Bolaria.

Whereas the XGS Core technology uses a centralized traffic scheduling mechanism, which can handle tens of terabits per second, Dune has a distributed scheduling system that can scale to hundreds of terabits per second, he said. Dune is the world's largest third-party maker of switch fabrics, Bolaria said. "It's probably the most scalable fabric in the market," he added. Most switch makers turn to third parties such as Dune for their fabrics, with Cisco Systems and Juniper Networks the main holdouts that still develop their own, Bolaria said. Broadcom probably has its eye on product development groups within those switch giants as potential customers, Bolaria said. Dune's products may turn more attractive to Cisco and Juniper if they come under the wing of Broadcom, which is much larger and more certain to be around to support major product lines for decades to come, he said.

The cost for those switch vendors to develop their own fabrics is immense, according to Bolaria. "Broadcom is saying, 'We can give you scalability,'" he said. If Cisco and Juniper turn to a third party such as Broadcom and data-center switch fabrics became standardized, the cost of the equipment should go down, he said.