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Dell Ups Turnaround Bet With $2.4B Quest Deal (Update 1)

"The addition of Quest will enable Dell to deliver more competitive server, storage, networking and end user computing solutions and services to customers," said John Swainson, president of Dell Software Group.

For more on Dell M&A, see why the company's unheralded M&A is moving it beyond the dying PC market.

"[The] most important investment theme around the Dell story is the Company's continued migration to higher-margin, enterprise products and services that are focused on serving the next generation data centers that are paving a path into the cloud," wrote Tokepa Capital Markets analyst Brian White in a Monday note to clients. White adds that while recent deals for Perot Systems, WonicWALL and Compellent strengthened Dell's IT services, security and storage businesses respectively, Quest Software is the company's biggest push in software and represents a platform to grow the business to $2 billion, as management has forecast.

As of 2011, Quest earned $857 million in revenue at an operating margin of 11%. With Quest, Dell will add the company's 1,500 software sales reps and 1,300 developers to its existing software business that earned $1.2 billion in revenue in 2011.

Morgan Stanley (MS) advised Quest Software during its "go shop" period, which has extended a highly watched private equity buyout drama. With Dell's bid, Quest Software's takeover premium now stands at over 50% to its shares prior to Insight's initial $23 a share March 8 bid.

In Monday trading, Quest Software fell over 1% to $27.75, while Dell shares rose under 1% to $12.55. year-to-date, Dell's shares are off nearly 15% on falling PC orders and weaker than expected earnings.

Dell's software push may come at turning point for the sector. In a Monday sector overview, Jefferies analysts cut expectations for Qlik Technologies (QLIK), Parametric Technology (PMTC) and Check Point (CHKP), citing slumping IT spending in Europe and the U.S.

In June, Deutsche Bank analyst Tom Ernst downgraded his price targets for a string of software companies including Adobe (ADBE), (CRM), VMware (VMW) and Intuit (INTU) on expectations for a slowing of economic growth in the second half of 2012, which will impact business spending on software. Ernst nevertheless points to, Bazaarvoice (BV) and Impreva (IMPV) as top growth stocks in the sector, with Microsoft (MSFT), Nuance Communications (NUAN) and Guidewire (GWRE ) as the sector's best defensive names.

Still, the software sector is rife with speculation that tech giants looking to diversify from PC and hardware sales will buy software specialists like Quest and BMC Software (BMC) as M&A heats up in the sector.

For more on software and tech M&A see why and tech giants are staking M&A bets on Facebook. Also see why a BMC Software hostile investor sheds new insight on whether deals can happen amid a cloud software boom and hardware gloom.

-- Written by Antoine Gara in New York
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