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Dell: Alien Abduction

The nerd of the computer industry makes a cool purchase.

If the computer industry were high school, Apple would be captain of the football team and Dell would be president of the math club. Known for its efficiency and manufacturing prowess, Dell's computers have never been as acclaimed as Apple's for their designs. But if Dell can't be cool, it can certainly buy cool. The company this week announced the purchase of Alienware, a maker of high-end computers beloved by hardcore gamers for their high speeds and sleek looks.

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Dell rarely buys companies. The two most recent acquisitions were of Web software developer Plural in 2002 and of electronic storage firm ConvergeNet Technologies in 1999. Alienware caters to a niche that competes directly with Dell's XPS line of personal computers for gamers. As part of Dell, Alienware will operate as a standalone company at its Miami headquarters, quarantined from its nerdy parent in Round Rock, Texas. And Dell will continue to make its second-rate XPS computers. Lehman Brothers analyst Harry Blount thinks cost-conscious gamers will buy the less expensive XPS boxes, while Alienware will continue to draw gaming fanatics.

Financially, Dell dwarfs Alienware. Sales of Alienware computers represent only 0.3% of Dell's total revenue of $56 billion for the fiscal year ended February 3. The deal will give a small boost to Dell's revenue but is "not a needle mover," says Steven Fortuna, a Prudential Financial analyst.

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Blount estimates that Dell paid $150 million to $300 million for Alienware. The acquisition could be worth the cost, he says, if Alienware's "cool" factor rubs off on Dell and helps it build a stronger brand image. Perhaps as important, the guts of Alienware computers might help Dell drive down component costs. Alienware uses microprocessors made by Advanced Micro Devices and Intel, while Dell relies solely on Intel chips. Having a second supplier gives Dell "the ability to drive down costs on the processor side," Blount says. Cut-throat competition from Asia makes supplier negotiations more important for Dell to maintain its earnings growth. For fiscal 2006, income rose 17%, to $4 billion, or $1.46 per share.

Dell (symbol DELL) recently traded at $30, or 18 times the $1.66 per share that analysts, on average, expect the company to earn for the year that ends next January. Blount and Fortuna believe the stock, which fetched nearly $60 in 2000, is worth $36.

--Thomas M. Anderson

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