March 22, 2006 2:22 PM PST

Dell to acquire Alienware

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Dell has agreed to purchase gaming PC maker Alienware, in a rare acquisition designed to improve Alienware's supply chain and boost Dell's standing among PC enthusiasts.

Financial terms of the deal were not disclosed. Alienware will operate as a wholly owned subsidiary of the world's largest PC maker, said Nelson Gonzalez, chief executive officer of Alienware. Gonzalez will now report to Jim Schneider, Dell's chief financial officer, but the company will operate separately from Dell, he said.

A Dell representative confirmed the deal, but said the company was deferring comment until later on Wednesday. A Dell representative in Australia had downplayed the possibility of a deal earlier this month. The transaction should be finalized about 30 to 45 days after regulatory hurdles are cleared, Gonzalez said.

There will be no cross-marketing of Dell and Alienware PCs on their respective Web sites, at least initially, said Jess Blackburn, a Dell spokesman. Some Dell-branded products that Alienware doesn't sell, such as monitors, might be sold on Alienware's site, but that hasn't been finalized.

The deal gives Dell a chance to tap into the profitable high-end PC gaming market, Blackburn said. The purchase is not material to Dell's finances, he said.

Alienware had considered raising capital through an initial public offering, but came to realize that being acquired by Dell would allow it to raise more money and to take advantage of Dell's supply chain and procurement expertise, Gonzalez said.

"We know our strengths and know our weaknesses, and one of our weaknesses has been supply chain," Gonzalez said. Both companies use direct sales models to reach customers, but Dell is well-known for its efficient manufacturing process.

In fact, it's so well-known for that strength that after rumors of the deal first surfaced some analysts said a company like Alienware would not be a good fit with Dell. Alienware specializes in exotic designs and colorful systems that take longer to build than the standard building blocks used by many of Dell's PCs.

But Dell's efficiency will not hurt Alienware's product development process, Gonzalez said. "We're not going to sacrifice the design of a product for the sake of the efficiency," he said.

Alienware will also continue to offer PCs that use processors from both Advanced Micro Devices and Intel, he said. Dell has an exclusive relationship with Intel, but that will not affect Alienware's relationship with both chipmakers.

"I can't speak for (Dell's product plans), but from our vantage point, nothing has changed there," Gonzalez said.

Analysts had been skeptical about the deal when it was first rumored, and some remained skeptical after it was announced.

"I still think it's a bad idea, and a bad fit," said Stephen Baker, an analyst with NPD Techworld. Alienware's customers buy from that company in part because of its image as a technology-driven company that understands the needs of gamers, while Dell is viewed by those customers as a stodgy corporate supplier.

Even though Gonzalez said Alienware will operate separately and not promote Dell on its site, "Alienware customers are smart enough to understand" that Dell will own the company, Baker said.

The deal also could mean that Dell has to rethink its consumer PC strategy, said Roger Kay, principal analyst with Endpoint Technologies Associates. The company has sunk a lot of effort into building its XPS lineup of high-end desktops and notebooks for gamers and multimedia enthusiasts. Now, it looks like those systems compete with Alienware in certain areas, he said.

Alienware sells very powerful and very expensive PCs to the top tier of the gaming market. Dell, on the other hand, has a stronger identity with casual gamers who want a good PC but don't want to pay Alienware prices. Both companies have recently tried to appeal to gamers that fall in between those two groups, with Alienware reaching down and Dell reaching up, Kay said. It's unclear how those strategies will continue.

See more CNET content tagged:
Alienware, supply chain, Stephen Baker, procurement, Dell

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I finally got in a position to afford an $8000.00 Alienware computer and now their owned by dell. This is terrible, there goes the dream of my life. It's a Dell Dude! is not what I wanted too hear. This really is depressing. I sell computers for a living. And all the people I talk too find this a dark era in computer history. You can already see the awful effect. The prices of Alienware have dropped considerably. Like alot of bad companies, they buy a well respected company with a good name and run it right in the ground. I like alot of people are truly disappointed that there is no longer Alienware computers. This is awful, Edward J Kelly
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