Dell CFO eyes M&A, growth for enterprise business

Shoppers walk past a Dell booth at the COMEX information technology and consumers technology exhibition in Singapore August 28, 2008.

AUSTIN, Texas (Reuters) - Acquisitions remain a main priority for Dell Inc, the company's finance chief said on Thursday, as the company charts an ambitious growth path for its enterprise business.

Dell on Thursday laid out a plan to roughly double its $16 billion server, storage and IT services business, as it aims to diversify a portfolio that is overly dependent on sales of low-margin personal computers.

To reach that goal, a significant portion of that growth would need to be inorganic -- from M&A activity -- Chief Financial Officer Brian Gladden said.

"The inorganic activity is going to have to be pretty relevant to make it work," he said in an interview following Dell's analyst meeting.

Dell has more than $11 billion in cash and investments on its balance sheet.

"M&A is a strategic priority for our cash usage and it'll be the majority of our cash usage for the short term."

Gladden noted that only 15 to 20 percent of Dell's cash is available in the United States. The company would be forced to repatriate cash from overseas -- and pay taxes on it -- or utilize debt financing for larger acquisitions.

But Gladden said its large pile of foreign cash is not a roadblock for its M&A strategy, which is focused on smaller deals.

"It's not going to get in the way of doing the transactions we think we need to do," he said.

Gladden said there are plenty of attractive takeover candidates.

"We're not struggling finding targets, we've still got enough work to do on the portfolio and there's still enough things out there that make sense for us."

COMPONENTS AND THE PC REFRESH

Dell has been grappling with rising costs for components such as memory, which has pressured the company's margins as it tries to boost profitability.

A year ago, Gladden said, memory comprised 6 percent of a typical PC's cost, whereas now it is closer to 12 percent.

Gladden expects component prices to stabilize at high levels for the next six months. Dell has made more component purchases farther in advance to insulate it from further price increases, he said.

Rising component costs, along with foreign currency impacts, have translated into higher selling prices for PCs across the industry.

The rollout of Microsoft's Windows 7 operating system has impacted demand, but not PC pricing, Gladden said.

Dell and other PC makers are beginning to benefit from a surge in spending as corporations replace four- and five-year-old hardware.

The company said this week it expects revenue for this fiscal year to increase as much as 19 percent.

The so-called corporate refresh cycle typically lasts for 18 to 24 months, Gladden said, with a big portion of the current cycle still to come.

PCs remain the core of Dell's business, making up more than half its revenue. But they remain a drag on profitability. The company set a target for a 5 percent operating margin in PCs.

"That's about as good as it's going to get, with good execution," Gladden said.

(Reporting by Gabriel Madway, editing by Matthew Lewis)