Matthew Dorn

Dell on Monday announced a definitive agreement to purchase Perot Systems, the IT services company founded by Ross Perot in 1988. The acquisition, expected to close between November and January, greatly expands Dell's reach into the IT services and support market, particularly in government and healthcare sectors. Dell is paying $3.9 billion for Perot Systems, a 68% premium over Perot's actual stock value. Here's a look at some of the key questions related to the deal. Why does Dell think Perot is worth such a high price?

The 2007 hiring of Stephen Schuckenbrock, former COO at Electronic Data Systems, was one of several moves signaling Dell's intent to move further into the services industry. Buying Perot is part of Dell's plan to expand its footprint in the IT services market, which may be a necessity in a time when hardware sales are falling. But the Perot deal is the strongest step yet in this regard. "Over the last couple of years they have more or less created a platform for a true entrance into the service market," says Forrester analyst Paul Roehrig. "They're really over-exposed on the hardware side. "In a lot of ways, this is a natural extension of the trajectory they have been on." (Read what analysts have to say about the acquisition.) The Obama administration's attempt to expand federally funded healthcare coverage is another consideration. By purchasing Perot, Dell immediately expands its penetration into both markets, which are likely to grow, Roehrig says. "If you were betting a couple billion dollars, what industry would you bet on?" he says. "In North America and globally there's a lot of technology enablement that has to happen in those spaces." Dell officials said they are also seeing demand from customers who want to virtualize their data centers and build private cloud networks, and buying Perot will significantly bolster Dell's ability to serve those customers. Nearly half (48%) of Perot's revenue comes from the healthcare industry, and 25% of Perot's revenue comes from the government sector.

How will Perot be operated within Dell? Dell said it will combine its own services organization with Perot's. The operation will be run out of Plano, Tex., Perot's corporate headquarters, and will be led by Peter Altabef, Perot's CEO. Dell has pulled in $5.1 billion in services revenue over the last year, while Perot did $2.6 billion in business, so the combined services organization has annual revenue of nearly $8 billion. Perot Systems will become the focus of Dell's services business. What will happen to Perot's employees and leadership team? Dell officials say they expect to cut $300 million in costs out of the two companies over the next two years.

As with any acquisition, there will likely be layoffs to reduce overlap between the two companies. Top executives are staying put, with Dell saying it has reached "long-term retention agreements" with both Altobef and "critical members of his senior leadership team." Perot has 23,000 employees. The 79-year-old Perot has served as chairman emeritus of the company's board since September 2004. Perot, a former presidential candidate and a major figure in the IT services industry for nearly five decades, is also the founder of Electronic Data Systems, which was purchased by HP. (Slideshow: Techies turned politicians)  Perot's son, Ross Perot, Jr., is a former CEO of Perot Systems and is now chairman of the Perot board of directors. Is Ross Perot still involved in Perot Systems? Perot, Jr. will be considered for appointment to the Dell board after the acquisition closes, according to Dell.

The acquisition "definitely makes a statement," says Gartner analyst Dane Anderson, and gives Dell new expertise in the healthcare and government markets. Should competitors in the IT services industry be worried by the Dell-Perot combination? But the merger is not a guarantee of success. "Whether they suddenly become the next big competitor to IBM, Accenture, or HP EDS, that remains to be seen," he says. HP, having purchased EDS, does $40 billion in services revenue, Anderson says. Size-wise, Dell's services organization still pales in comparison to some competitors. IBM is even bigger with $57 billion in services revenue.

Yes, but which company might get acquired next is anyone's guess, Anderson says. With EDS and Perot now off the block, are there any other IT services firms that might be acquired? Companies like CSC and Accenture could be takeover targets, but the same could be said of numerous services vendors. "The reality is, I'm not sure anyone is out of play," Anderson says. "The issue is who has got the intestinal fortitude and cash to make things happen." HP and IBM obviously have the cash. You really have to find a way to create volume in those smaller deal sizes." Can we expect Dell to make more acquisitions? But HP already acquired EDS, and IBM has such a large services organization that further growth will be difficult to achieve. "I don't think IBM will acquire a big services company, but it's not necessarily ruled out," Anderson says. "IBM already has $57 billion, $58 billion in services revenue, so how do you grow that effectively, especially when there are many fewer billion-dollar plus deals out there?

Yes. Should Dell and Perot customers have any concerns about the merger? Dell was able to expand its ISCSI storage business last year by purchasing EqualLogic and has indicated a willingness to continue expansion through acquisition. "We're looking for more things like EqualLogic which build on strong IP and allow us to extend the significant customer reach we have," Michael Dell, chairman and CEO of the company, said in a conference call Monday. Customers should always examine the potential ramifications of an acquisition, analysts say. But on balance, customers have reason to expect that the Dell-Perot combination will provide new opportunities or at least not be harmful. "With these kinds of integrations, clients get nervous," Roehrig says. One question is whether Dell will pressure clients to use Dell hardware rather than servers and storage from Sun, HP or others.

But "customers shouldn't panic about this. In fact, they should look at it as an opportunity to see if it remains a good fit and see if they can generate additional value for their own firms based on [the combination of Dell and Perot]." Customers of service companies that have close partnerships with Dell's hardware division may have reason to be nervous, however. "If my service provider is really relying on Dell, that's something I'd worry about," Roehrig says.

Federal Communications Chairman Julius Genachowski told Congress today that the FCC would have a new plan for auctioning off a key piece of public safety spectrum by February 2010. Speaking before the House Energy and Commerce Subcommittee today, Genachowski said that plans for the spectrum, commonly referred to as the "D block" on the 700MHz band, are part of the FCC's emerging national broadband plan due to be delivered to Congress next year. But while the total spectrum bids for the 700MHz band nearly doubled congressional estimates of $10.2 billion, no bidder met the reserve price for the D block, which was originally reserved for the construction of a high-speed public safety network that would bring America's emergency response system up to date with next-generation technology. Genachowski would not provide any further details on what form a new auction for the D block would take and only said that the commission was working diligently to get the block on the market. "The challenge is in getting this right and we don't want to rush into failed auction," he said. "The D block comes up often in connection with our broadband plan but don't have anything concrete right now." The FCC had originally tried to auction off the D block as part of its auction of spectrum on the 700MHz band last year. When the auction ended, the top bid for the D block was less than half its $1.3 billion reserve price.

Frontline Wireless, a start-up carrier that had planned to bid aggressively for the public safety block, announced that it was shutting down its business just weeks before the 700-MHz auction began. In the weeks leading up to the auction, analysts at the Yankee Group predicted that the "horrendous" ownership costs of the block, whereby prospective licensees would be responsible for building out a national public safety network with 75% population coverage within four years of getting the license, would deter companies from making significant bids on the spectrum. With Frontline out of the picture, the D Block received only one significant license bid, and the fate of the spectrum has been in limbo ever since.

The iPhone's new defense - meant to prevent users from reaching phishing sites - is inconsistent at best, a security researcher said today, with some users getting warnings about dangerous links, while others are allowed to blithely surf to criminal URLs. Other experts said that the fickle feature is worse than no defense at all. But according to Michael Sutton, the vice president of security research at Sunnyvale, Calif.-based Zscaler, the new protection is "clearly having issues." At first, said Sutton, the anti-phishing feature was simply not working. "It was blocking nothing," Sutton claimed after testing iPhone 3.1's new tool Wednesday against a list of known fraudulent sites. Apple quietly added an anti-fraud feature to the iPhone's Safari browser with the update to iPhone 3.1 , released Wednesday.

By Thursday, things had improved, but just barely. "Yesterday, it started blocking some sites, for some users, but it was inconsistent. Apple relies on Google 's SafeBrowsing API (application programming interface) for the underlying data used to build anti-phishing and anti-malware blocking lists for the desktop edition of its Safari browser. Some sites are being blocked, others are not." That led Sutton to believe that the feature's functionality wasn't the issue, but how Apple updates users with a "blacklist" of malicious sites. Other browser makers, including Google and Mozilla, also use SafeBrowsing. "It appears some iPhones are getting timely updates [from Apple], but others are not, or are getting different [block list] feeds," Sutton said. "I'm feeling better about the feature than I was Wednesday, but clearly Apple is still have issues. URLs that are blocked by Safari in Mac OS X open and direct users to malicious pages [on the iPhone]." Like Sutton, James reported inconsistencies in the anti-fraud feature's effectiveness. "All we've come up with is that sometimes it works and sometimes it doesn't," said James. "This is clearly more dangerous than no protection at all, because if users think they are protected, they are less careful about which links they click." The new feature is turned on by default in iPhone 3.1; the option to turn it off is in Settings/Safari/Security, and is listed as "Fraud Warning." Sutton, although willing to concede that Apple overall is improving its security track record, bemoaned the state of mobile security in general, and the iPhone's in particular. "The greater concern to me is that we're making the same mistakes in mobile that we made on the desktop," he said. "On the desktop, security has gotten slowly better, but [with mobile] we have a fresh start.

With the [media] coverage of the problem, maybe they're resolving it, or trying to." On Thursday, researchers at Intego, a Mac-only antivirus vendor, echoed Sutton's findings. "This feature should warn users that they may be visiting a known malicious Web site and ask if they wish to continue," said Peter James, a spokesman for Intego who writes the company's Mac security blog . "However, we have extensively tested this feature, tossing dozens of phishing URLs at it, and it simply does not seem to work. I would have thought we would have learned from our mistakes, but there's virtually no protection in mobile browsers." According to research conducted by NSS Labs, which was hired by Microsoft to benchmark different desktop browsers' ability to block malware-laden sites, Safari in Mac OS X and Windows blocked only one-in-five malicious sites . Internet Explorer and Firefox, meanwhile, blocked 80% and 27%, respectively. Last month, NSS Labs attributed the disparities between Firefox, Safari and Google - all which use SafeBrowsing as the basis for their blacklists, to differences in how each browser tweaked, then applied, the lists. Google's Chrome blocked a paltry 7% of the sites.

Kai-Fu Lee, who left his job as Google's China head last week, launched an angel investment fund on Monday that aims to cultivate three to five new high-tech companies per year in China.

The fund, named Innovation Works, launched with US$115 million in investment from major IT players including Foxconn and Legend Group, the parent company of Lenovo, it said in a statement. The fund will use the money to train young entrepreneurs and help them build companies that could later be sold or listed on a stock market. It will focus on the Internet, mobile Internet and cloud computing industries in China.

The fund aims to develop 50 companies and train 500 people in 10 years, and may eventually seek a public listing itself, Lee told reporters at a briefing.

"My hope is there will be a company in these 50 that becomes a world-class company," he said.

Innovation Works will speed the growth of its companies by giving them shared resources, such as software and server room space, and potentially by helping them partner with the fund's own investors, such as Legend, Lee said.

The fund is launching in a market where entrepreneurial skills are currently scarce, Lee said. Compared to most angel investment outfits, the fund will both keep a larger cut from the sale or listing of its offspring and give them more support, Lee said. The fund may be able to spin off companies within its first year, and it will pay back its investors when it begins doing so more regularly after three to five years, Lee said.

China's Internet industry is booming as incomes rise in the country and more people get online. Official statistics say China had nearly 340 million Internet users at the end of June, more than the population of the U.S.

Other investors in Innovation Works include venture capital firm WI Harper Group and Steve Chen, a co-founder of YouTube.

Lee left Google last week after four years as the company's president of Greater China, during which he led the company's growth into a formidable player in China's online search market.