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September 24, 2017

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U.S. CEOs paying record premiums in M&A

Executives say they're finding bargains based on projected earnings. Analysts predict per-share income for companies in the S&P 500 will jump to US$94.98 a share in 2011 from US$62.52 this year, according to the average estimates in a Bloomberg survey.

While the S&P 500 trades for 22.2 times its companies' profits over the last 12 months, the price-earnings ratio falls to 11.6 when measured against analysts' 2011 forecast, according to data compiled by Bloomberg. The multiple using reported profit has fallen to that level once since 1990, in March 2009 on concern US$1.7 trillion in bank losses and writedowns would spur a global depression, data compiled by Bloomberg show.

Dell acquired Perot to expand in the market for health-care information technology. The takeover gave Round Rock, Texas- based Dell a partner to boost sales of computer services as companies reduce PC purchases.

The second-largest personal-computer maker agreed to pay US$30 a share in cash for Plano, Texas-based Perot, whose stock had already jumped 31 percent in 2009. It valued the company at 29 times the average analyst projection for 2010 profit.

Dell, whose shares have dropped 18 percent since the deal was announced, paid twice as much relative to sales as Hewlett- Packard Co., the biggest personal-computer maker, gave shareholders of Electronic Data Systems Corp. in its takeover last year, data compiled by Bloomberg show.

The US$13 billion price Palo Alto, California-based Hewlett- Packard agreed to was about half EDS's annual revenue, compared with the 1.4 times sales that Dell offered, according to data compiled by Bloomberg. Hewlett-Packard has gained 10 percent since the takeover was announced in May 2008, compared with a 6.4 percent retreat for computer companies in the S&P 500.

"Given historical acquisitions we've seen in terms of H-P, what they paid for EDS based on revenues, it just seems like you're paying a little more," JPMorgan Chase & Co. analyst Mark Moskowitz said on a conference call with Dell's management after the buyout was announced.

The transaction will start adding to earnings in the fiscal year that begins in February 2011, the company projects.

"Our investors have to trust that we'll manage those decisions effectively," Dell Chief Financial Officer Brian Gladden said in a Dec. 16 interview.

Xerox, in Norwalk, Connecticut, agreed to pay US$63.11 a share in cash and stock for Affiliated Computer in September to shift to technology services as sales of printing equipment drop. Dallas-based Affiliated Computer trades at 12.8 times projected 2010 earnings.

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