Dell Should Hire Mark Hurd, Acquire RIM

Both HP (NYSE:HPQ) and Dell (NASDAQ:DELL) reported strong results last week. Early this month, HP rattled the market when it announced the resignation of CEO Mark Hurd. In his five years at the helm of HP, Hurd has turned around the company and steered it through the recession and through many strategic acquisitions such as EDS, 3Com, and most recently Palm to position it strongly in adjacent markets. Only time will tell if HP without Hurd would be able to preserve the momentum. Meanwhile, Hurd has various options where he can put his excellent leadership skills to use.

HP last week reported strong third quarter results that beat estimates. Q3 revenue was $30.7 billion, up 11%. Net income was $1.8 billion or $0.75 per share compared to $1.7 billion or $0.69 per share last year. HP ended the quarter with $14.8 billion in gross cash after repurchasing shares for $2.6 billion and paying dividends of $205 million. Q2 analysis is available here.

Imaging and Printing Group (IPG) revenue increased 9% to $6.2 billion. Personal Systems Group (PSG) revenue increased 17% to $9.9 billion with Notebook revenue up 10% and Desktop revenue up 27%. Services revenue increased 1% to $8.6 billion. HP Software revenue increased 2% to $863 million and Enterprise Storage and Servers (ESS) revenue was up 19% to $4.4 billion. HP Financial Services (HPFS) revenue increased 14% to $764 million.

HP closed the 3Com deal last quarter. ProCurve revenue increased 42%, and HP Networking overall increased 198% including the impact of the 3Com acquisition. HP reported double-digit growth in all of its region, with the Americas growing 12%, EMEA 9%, and Asia Pacific 14%.

For the fourth quarter, HP expects revenue of $32.5 billion to $32.7 billion and EPS of $1.03 to $1.05. For the full year, the company raised its outlook and now expects revenue in the range of $125.3 billion to $125.5 billion. It lowered its EPS outlook to $3.62 to $3.64 from the earlier guidance of $3.76 to $3.81. HP is trading around $40 with market cap of about $93 billion. It hit a 52-week high of $54.75 on April 16. The stock plunged after Hurd’s resignation on August 6 and hit a 52-week low of $39.95 on August 12. The stock has dropped about 15% and lost about $18 billion in value just over fifteen days.

HP acquired Palm for $1.2 billion in April, and it is expected to come up with a tablet based on Palm’s Web OS early next year. Klint Finley of ReadWriteWeb reports that HP has even registered the trademark PalmPad. The Web OS–based tablet will target the consumer market, while Palm’s Windows-based tablet, Slate, will focus on the enterprise market.

Continuing its acquisition spree, HP last week announced its plans to buy Fortify Software for an undisclosed price. Fortify complements HP’s existing dynamic application security solution and strengthens its leadership position in application and information security. Last week, Intel also made a security acquisition – that of antivirus software company McAfee, for $7.7 billion. It’s an odd move, if you ask me.

Dell also announced an acquisition last week. It offered to buy data storage and management company 3PAR for $1.13 billion. However, as of this morning, HP has countered with an offer to buy 3PAR as well topping Dell’s $18 per share offer with $24 per share. In July, it acquired Scalent, developer of virtual infrastructure management technology, and Ocarina Networks, a developer of storage optimization technology, including compression and deduplication. Dell ended the quarter with $13.1 billion in cash.

Dell also reported strong second quarter results that beat estimates driven by strong growth in its enterprise solutions. Q2 revenue was up 22% to $15.5 billion. Net income was $545 million or $0.28 per share compared to $472 million or $0.24 per share last year. Q1 analysis is available here.

Dell’s server and networking revenue increased 35%. Storage revenue was up 13% driven by EqualLogic storage products, which grew 63%. Revenue from services, driven by the $3.9 billion acquisition of Perot Systems, increased 57% to $1.9 billion. Mobility revenue was up 21% and desktop revenue grew 17%. There was revenue growth across all of Dell’s regions: Asia Pacific/Japan grew 38%, the Americas 17%, and EMEA 24%. But pressure from Apple will continue to mount over the next five years on all fronts – computing, mobility, and smartphones.

Dell expects revenue growth for the year to be in the 14% to 19% range. The stock is trading around $12 with market cap of $24 billion. It hit a 52-week high of $17.52 on April 23 and a 52-week low of $11.72 on July 6.

Richard Waters of Financial Times reports that the pressure is mounting on CEO Michael Dell as 25.1% of the shareholders voting at the company’s annual meeting withheld their support for Mr. Dell’s reelection as a director following allegations of fraud against both the company and Mr. Dell personally. But there is a deeper reason for this show of dissatisfaction – the slow pace of turnaround as well as the slowness to adopt to the convergence device movement.

In May, Dell released Mini 5 aka Streak, its five-inch tablet based on the Android OS. Android’s momentum is gaining – Motorola is doing a nice turnaround on the strength of Android, and HTC is also emerging as an interesting player. In fact, Nokia should abandon Symbian and move to Android.

What Dell needs is a strong strategic acquisition in the smartphone category. The company missed out on the opportunity to acquire Palm and strengthen its convergence device strategy. RIM is still out there and is also in need of an alliance with a computer maker. Dell should acquire RIM and hire Mark Hurd to manage the merger. Without existing market share, Dell’s entry into the tablet and smartphone world will otherwise be a feeble attempt at best. And Mr. Dell, perhaps, needs to step back and let someone else with strong turnaround track record run the company for a while. Who could be better than the man who turned around his rival, HP, with such panache?