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Dell Shows Brotherly Love

The PC maker buys a small email provider co-founded by Michael Dell's brother for $155 million.



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didn't have to look very far to find its latest acquisition target.

The PC maker's move Tuesday to buy MessageOne for $155 million is a transaction from one Dell to another.

Austin, Texas-based


, which provides corporate email storage services, was co-founded by Adam Dell, brother of Michael Dell, CEO of the company which carries the family surname.

What's more, the brothers Dell are both partners in an investment firm which owns more than 22% of MessageOne's capital stock.

In announcing the deal, Dell stressed that the company implemented various checks and safeguards to ensure that the deal was in the best interest of Dell shareholders, despite the familial bonds between the firms.

According to the company, Michael Dell was locked out of negotiations of the acquisition terms and from all aspects of the decision-making process, while independent members of Dell's board vetted the process by which management identified, analyzed and negotiated the deal.

The $12 million that Michael Dell and his wife, and his children's trust, will receive from the deal will be donated to charity, the company said. Adam Dell will receive $970,000 from the deal.

To be sure, the deal appears to fit in with Dell's strategy of fleshing out its menu of technology services for corporations. In the past year, Dell has made a string of similar acquisitions, including Everdream and Silverback Technologies, although the prices of those deals were not disclosed.

Matt Cain, an analyst at industry research firm Gartner, says adding MessageOne bolsters Dell's push into high-margin services, as it seeks to move beyond the rapidly commoditizing PC market.

"This is a way for Dell to diversify their portfolio and jump into markets that are expected to have an extremely fast growth rate," says Cain.

MessageOne provides email disaster recovery and archiving, as well as spam and virus filtering, to corporations through an online distribution model referred to as Software as a Service.

Shares of Dell were off 6 cents at $19.87 in trading Tuesday.

At $155 million (plus additional $10 million to be used for management retention), the proposed purchase of MessageOne would appear to rank as Dell's third-largest deal by price, behind the $1.4 billion EqualLogic deal and the $340 million deal for ASAP Software.

Dell said it received an opinion from Morgan Stanley that the price of the MessageOne deal was fair. But the company said nothing about how the deal's valuation was calculated.

Gartner's Cain says that recent similar deals, such as


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$625 million purchase of Postini in July, have carried a premium of 6 times sales.

According to

though, MessageOne had a mere $7.7 million in fiscal 2007 sales, which would mean that Dell is paying 20 times MessageOne's sales.

Michael Rosenfelt, executive vice president of MessageOne, says the


information is inaccurate, but wouldn't disclose actual sales for MessageOne. He noted that Deloitte & Touche named MessageOne the fastest-growing tech company in Texas in October, with a compound growth rate of more than 1,000% in 2002-2006.

A call to Dell was not returned.

It's also not clear whether Dell looked at any other similar companies as it contemplated the deal, or simply went straight for MessageOne.

Judging from the announcement, it appears that Morgan Stanley's role was limited to offering an opinion on the price, rather than acting as an intermediary in the deal and introducing Dell's management to alternative acquisition possibilities.

Dell's acquisition of MessageOne is a good move for the PC maker as it looks for new growth opportunities. But given the glaring conflicts of interest involved, Dell has an obligation to go beyond the bare minimum in assuring shareholders that it acted in their best interest.