Which valley giant might buy Dell?

Last last year, in my annual prediction column, I included one far-out, wacky suggestion: Cisco Systems would buy Dell.

Though admittedly a long shot, my rationale was that Hewlett-Packard was moving into networking with its purchase of 3Com. That made it a direct competitor with Cisco. Both companies want to fight for big corporate customers, but HP has an advantage by simply being bigger. Though PCs are a dicey business, the best way for Cisco to level the playing field would be to buy Dell.

I’ve put that out of mind until the last few weeks when a series of events got me thinking that it could make sense. And now there’s a twist: Could Oracle be interested in Dell? I posted a short thought about this on Facebook yesterday after Oracle officially announced it was hiring Mark Hurd, the ousted CEO of HP. They now have a co-president with extensive experience running the largest PC maker in the world. Imagine what Hurd could do with Dell? And what delicious revenge it might be for him to take on HP in the PC business?

A year ago, I would have never thought about Oracle buying a PC company. But now that they’ve done the unthinkable and plunged headlong into hardware by buying Sun Microsystems, how much crazier would it be to see them buy Dell? In fact, yesterday, Quentin Hardy of Forbes also mused about the possibility of Oracle buying Dell:

“The last big Oracle buy was Sun Microsystems. At the time, people liked the software Oracle got from that deal, but wondered what to do with the hardware. Sure, it could sell high-performing Sun servers loaded with Oracle database and application software, but at what acquisition cost?

That deal makes more sense if Oracle adds to its hardware offerings with a comprehensive desktop and laptop offering. Dell has that, along with servers, storage, and a little network switching. More important, it has extensive corporate relations in selling to different parts of a corporate base than Oracle now touches.”

The company in the middle now is Dell. Following their loss in the 3PAR bidding, they are a wounded duck. They have a market cap of $24.4 billion, and annual revenue that fell last year to $52.9 billion.

By comparison:

• Cisco has a market cap of $117.4 billion and annual revenue of $36.1 billion.
• HP has  a market cap of $82.9 billion and annual revenue of $114.b5 billion in 2009.
• Oracle has a market cap of $120.4 billion and annual revenue of $26.8 billion.
• Microsoft has a market cap of $206.23 billion and annual revenue of $62.5 billion.
• IBM has a market cap of $158.5 billion and annual revenue of $95.8 billion.

I mention Microsoft only because of something Oracle founder Larry Ellison said a few years ago when he predicted the IT industry would consolidate. Ellison said there would be a handful of giants left at the end of the day, including Microsoft, HP, IBM, and a couple others. (I don’t remember the exact list, but I think there were five).

In any case, he wanted to make sure Oracle was one of the few giants left. And so he said Oracle needed to acquire large numbers of companies to boost its revenues and size to keep pace with companies like Microsoft. Being bigger would allow the company to spread costs such as R&D over a wider base, Ellison said.

That rationale remains as true today as it was then. Dell, first and foremost, needs to get much larger to remain competitive with HP. The fastest way to get there is acquisitions. But we’ve seen that Dell doesn’t have the resources to go toe-to-toe with HP. In fact, HP could simply starve Dell by outbidding them time and time again.

No, the best option for Dell at this point is to be acquired. But by which company?

HP probably couldn’t buy Dell without getting hung up on anti-trust issues. But if Cisco bought Dell, you would have a company with close to $90 billion in annual revenue, a number that significantly closes the gap with HP. And if Oracle bought Dell, you’d have a company with more than $60 billion in annual revenue, still only about half HP’s revenue, but closer.

Over at Silicon Valley Watcher, Tom Foremski wondered whether Oracle might buy HP:

“Yes, it is a big pill to swallow however, it would enable Larry Ellison, CEO and co-founder of Oracle to perform an end run in the massive global IT market and also leave a substantial legacy on his upcoming retirement.

If there is one thing we know about Larry Ellison is that he is motivated by big goals. Is this one too large for him?”

While I see Tom’s logic, I still find this scenario to be unlikely. Oracle has a lot of money, but it would probably need to make a hostile, all-cash bid for HP, which would be way too expensive. It would have to borrow massive amounts and take on big debt. Oracle’s stock wouldn’t be that attractive to HP shareholders, given that until the last couple months, Oracle and HP stock prices have tracked pretty close together:

However this plays out, expect lots of drama over the next few months. There’s no love lost between these companies. And with the economy stagnant, big players have clearly decided that acquisitions are the way to grow.