It looked as though Quest Software (NASDAQ:QSFT) had a done deal to go private. Insight Venture Partners had agreed to shell out some $2 billion for the company.
Quest Software would certainly be a good fit for Dell. The company develops technologies to help improve the performance and productivity of existing applications, such as those from Oracle (NASDAQ:ORCL) and Microsoft (NASDAQ:MSFT). The software also works across physical, virtual and cloud environments.
No doubt, Quest faces tough competitors, such as CA (NYSE:CA) and BMC (NYSE:BMC). Yet the company has proven that it can build standout solutions. Beside, once customers adopt Quest’s software, it becomes costly to look for alternatives.
In terms of growth, Quest has been a decent performer. Revenues increased by 12.8% in the latest quarter, to $212.2 million. Cash flows were also flush, coming to $52.2 million.
For Dell, the acquisition of Quest would be in line with its strategy to find growth and boost margins. But the deal would not be a panacea.
Dell’s revenues still mostly come from the PC business — and that market is undergoing disruptive change. The main problem is Apple’s (NASDAQ:AAPL) iPad, which is dangerously eating into the market for PCs.
That’s why Microsoft is entering the tablet market with its Surface device. This could be an even bigger threat to PCs since it targets corporate customers. Surface will be compatible with Office and have an integrated keyboard and stand.
For now, Dell is now the No. 3 player in PCs, behind Hewlett-Packard (NYSE:HPQ) and Lenovo Group. So the company is becoming marginalized in any case.
Remember that Dell may not even acquire Quest since other major tech operators, including IBM (NYSE:IBM), could make a bid. In the past, Dell has lost out in bidding wars for other companies, such as 3Par, back in 2010.
Dell is smart to ramp up its acquisitions of software companies. But the price tags will not be cheap — and it won’t be easy to pull off these deals. At the same time, Dell’s core business looks bleak. So all in all, it’s best to avoid the stock for now.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of the upcoming book How to Create the Next Facebook: Seeing Your Startup Through, from Idea to IPO. Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.