Dell Moves Further From Faltering PC Business

NEW YORK ( TheStreet) - Dell ( DELL) is further distancing the company from its bread-and-butter personal computer businesses by buying network security and data-protection specialist SonicWall.

While terms of the deal weren't disclosed, the move proves Dell is looking to cut deals and grow in businesses tied to IT services and software. Especially acute is Dell's growing threat Hewlett Packard ( HPQ) as the company uses acquisitions and billions in cash to take on wounded competitors and IT service giants like IBM ( IBM).

"There is an opportunity for us that is generated by the turmoil and uncertainty at one of our major competitors," said Chief Executive Michael Dell In October of possible acquisitions as HP undergoes big change, according to Bloomberg.

SonicWall is Dell's first sizeable 2012 deal to grow its non-PC business and steal share from larger competitors. San Jose, Calif- based SonicWall, provides tech services that detect and protect networks from malware and other invasive attacks, while also providing data backup and recovery. The company was bought by a private equity consortium for $717 million in 2010.

"We are building a strategic software portfolio to address the needs of our customers," said Dell software group president John Swainson in a press release. "Our customers see security as a key IT concern for the foreseeable future."

"We consider network security one of the most strategic categories within IT today, and view the SonicWALL acquisition as a good fit with Dell's product portfolio," wrote Baird analyst Jayson Noland in a note to clients. He gives shares a $20 price target on a "neutral" rating.

The acquisition of a market leading firewall and security leader may also put Dell in competition with new competitors like Check Point Software ( CHKP), Juniper Networks ( JNPR) and Cisco ( CSCO), says FBN Securities analyst Shebly Seyrafi. "The deal allows DELL to play in the next generation firewall market, but we believe that it will compete against leaders such as CHKP and Palo Alto Networks primarily, and against FTNT, CSCO, JNPR, and INTC/McAfee secondarily," wrote Seyrafi, who gives Dell shares a $19 price target on a "sector perform" rating.

That competition could continue to ratchet up in future deals, as Dell targets IT services to offset waning PC sales, which the company expects to fall 7% in the first quarter. In the U.S., PC sales fell nearly 5% in 2011, according to research firm IDC.

Jefferies analyst Peter Misek estimates that Dell paid up to $1.5 billion for SonicWall and noted that the move wouldn't preclude a potential takeover of IT systems specialist Quest Software ( QSFT). "We think Dell is likely taking a look at QSFT during the current 60 day shopping period and that the company would fit well with Dell strategically," wrote Misek in a client note. He rates Dell a "hold" with a $17 a share price target.

Dell shares gained under 1% in Tuesday trading to $17.07 on news of the deal. The company's shares are up nearly 1 year-to-date after gaining over 6% in 2011.

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For more on Dell shares, see why Dell needs drastic action. For more on technology M&A, see 5 tough sells in the tech sector.

As Dell targets deals outside of its PC's business, the company's now bolstered IT services businesses are showing promising signs, with management signaling a further commitment to its presence in the increasingly competitive market.

Sales at its data storage and networking unit rose 5% in the fourth quarter. Meanwhile, February data distributed by Gartner showed Dell gaining a 14.8% server market share from 13.1%, cutting at the over 30% market shares of larger competitors IBM and HP.

In February, Dell unveiled a new line of business servers called PowerEdge that will integrate with its storage gear products and speed up computing tasks for customers. Those servers, networking and data storage products accounted for 31% of Dell's $16 billion in fourth quarter sales.

Dell missed fourth quarter estimates on falling demand for P.C.'s, a unit that comprises over 50% of overall sales, but is falling as a percentage of revenue.

Sales at its data storage and networking gear unit rose 5% in the fourth quarter, a services unit for small and midsize businesses got a 6% boost. With Tuesday's acquisition and similar deals AppAssure in February and a $856 million deal for Compellant Technologies in August,

Meanwhile, in late February data distributed by Gartner, Dell boosted its server market share to 14.8% from 13.1%, cutting at the over 30% market shares that competitors IBM and HP held in the market. It was also the only vendor among the top 5 server suppliers to show revenue growth.

Overall, analysts give Dell shares a price target of $19.17, according to Bloomberg data.

-- Written by Antoine Gara in New York

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