The son of an orthodontist and a stockbroker, Michael Saul Dell has done reasonably well for himself – he’s about the 40th richest person in the world. But now he and a private equity group have announced plans to take Dell private, in the largest leveraged buyout since the Great Recession. Will this be the smartest move of his glittering career, or the final nail in Dell’s coffin?
Michael Dell showed his aptitude for business from a very early age. In a bid to enter business early, he applied to take a high school equivalency exam aged just eight. In his early teens, he invested his earnings from part-time jobs in stocks and precious metals, and at high school he made more money selling subscriptions to the Houston Post newspaper than the annual income of his economics teacher.
In 1992 aged just 27, he became the youngest CEO to have his company ranked in Fortune magazine’s list of the top 500 corporations. Fast forward to the first quarter of 2001 and the firm had reached a world market share of 12.8%, passing Compaq to become the world’s largest PC maker. The company’s combined shipments of desktops, notebooks and servers had grown 34.3% worldwide, at a time when competitors’ sales were shrinking.
But in recent years Dell has had a tougher time, and it’s all Steve Jobs’ fault. If that turtleneck-wearing maverick hadn’t believed in tablet computers, people would still be buying PCs, running Microsoft Windows – and still be waiting the best part of a minute for the things to turn on. But Jobs did believe in the iPad, and so did the 15 million customers who bought the first generation.
Since then tablets from Apple, Samsung, Amazon, Acer and others have simply exploded. Analyst firm Gartner recently confirmed what we all knew already: that tablets are eating into PC sales. The firm said in the fourth quarter of last year, global PC shipments declined 4.9%, while in EMEA shipments declined even faster – by 11.7%.
But that’s not the only problem for Dell. Its core PC business also faced very stiff competition from market leader HP and number two, the Chinese manufacturer Lenovo, which several years ago bought the rights to IBM’s ThinkPad brand. In the fourth quarter, HP retained its market lead but sales were flat year on year. Lenovo grew sales 8.2%; Dell lost 2%. Indeed among the top five vendors, only Lenovo saw any growth.
Losing a shrinking market
To be losing market share in a market that is itself in decline is bad news, very bad news. Competition from rivals, tablets and even smartphones (where Dell has no product) has also brought price pressure in a market that already had relatively slim margins. The other problem is that while Dell did come up with some of its own inventions, it left most of the PC innovation to Microsoft and Intel – Dell’s biggest early innovation was in the brutal efficiency of its supply chain. These days, it turns out the likes of Lenovo and Acer can play that game too. Meanwhile Dell’s own tablets, such as the Streak, have largely failed to capture consumers’ imagination. Add it all up and in its latest quarter Dell saw profits slide 47%.
Shareholders saw the cracks appearing and Dell’s stock started to slide last year. There’s serious concern that the issues are neither temporary nor easy to fix. Michael Dell has talked about the idea of taking Dell private for a few years now, and after several weeks that saw leaks that it was about to come to pass, the deal was announced in early February.
In a $24.4 billion leveraged buyout, Michael Dell becomes the largest individual shareholder, with a 14% stake. The other big investor is private equity firm Silver Lake Partners, but there’s also a $2 billion loan from Microsoft, which has an obvious interest in seeing Dell survive. Other investors include MSD Capital, Bank of America Merrill Lynch, Barclays, Credit Suisse and RBC Capital Markets.
But at least one analyst thinks there’s a flaw in the plan, because it needs shareholder approval. While the price being offered for the shares is a 25% premium on Dell’s closing share price of $10.88 on January 11, just before the rumours of the buy-out began, it’s still way off the $17.61 that the shares were trading for a year ago, and offers little premium over Dell’s more recent stock price. "I think the key question here is will shareholders approve this deal, because there is practically no premium where the stock is trading," Sterne Agee analyst Shaw Wu said.
But assuming they do go for the deal, what next for Dell? Rival HP has already issued a statement saying the deal creates "uncertainty" around Dell, which is probably true, according to analyst firm Ovum. Its chief IT analyst Carter Lusher noted that, "Dell is in the midst of a wrenching transition from a supplier of commodity hardware, mainly traditional PCs, to being a supplier of enterprise-grade IT infrastructure. Dell’s ambition is nothing less than offering the entire IT stack with supporting services. A significant risk likely to face Dell during this transition is that enterprises and public sector organisations cut back on their purchases ‘until the dust settles.’
"The implication of going private is that Dell is planning radical changes to its strategy and product roadmap. While the company might come out of this transition stronger with a product line-up that better meets the needs of businesses and public sector organisations, there will be uncertainty as to what products and services stay, get strengthen, or get eliminated," Lusher said.
"Ovum sees effective communication to prospects and customers about its strategy and product roadmap as a, if not the, critical success factor to get through the transition. While this might sound simple it is not. Compounding Dell’s challenge is the deep seated brand identity as a ‘PC company.’ Another communications challenge will be how Dell Services (built on the Perot acquisition) shares its financials for the due diligence phase on large, multi-year IT services deals. Ovum recommends that CIOs need to asset the risk to their infrastructure and put into place plans should Dell’s radical hardware, software, and services shifts require changes to procurement plans."
What is certain is that Dell is by no means out of the woods. Having see the writing on the wall it’s been in transition for some time now, trying to become less reliant on the PC side of the business by moving more into software and services, as well as higher-end computer technology like servers, networking and data storage equipment. Dell has been on an acquisition spree to make it look more like an IBM, HP or Oracle. In 2009 it bought Perot systems for IT services; in 2010 Compellent for storage; in 2011 SecureWorks for security and Force10 for data centre networking. Last year it bought Wyse for thin clients, SonicWALL and Appsure for security and Quest for systems management. That’s fine and dandy, but having not previously been particularly acquisitive, it has some integration challenges to overcome first.
I met up with Dell’s president of software, John Swainson recently. Even his hiring was a sign of Dell’s intent to become a full systems vendor through a series of acquisitions – Swainson was formerly CEO at the oh-so-acquisitive CA (a.k.a Computer Associates), which he led from 2005 to 2009. But he told me the software acquisitions at Dell are very different from his experience at CA: "I’ve done 43 acquisitions, and normally you’re getting the acquired companies to conform to what the buying company wants. But Dell didn’t have a software division so there was nothing for them to conform to. It’s very different but there are early signs of success."
Is integration all going to plan? "Realistically it will take some time," he said. "Our customers are demanding we provide a more complete solution and that’s what we’re working on."
So what will Dell do differently, assuming shareholders approve its plan? According to Dell CFO Brian Gladden, not a lot. He told Reuters that it will continue along the same path, but that, "Under a new private company structure, we will have time and flexibility to really pursue and realise the end-to-end solutions strategy. We will be able to pursue organic and inorganic investment and we won’t have the scrutiny and limitations associated with operating as a public company."
But if Dell really wants to look like an HP, Oracle or IBM, it’s got a lot more acquisitions yet to do. That may be harder now that it can’t easily buy companies with its shares (although its backers do have deep pockets). Ultimately, it remains to be seen whether this deal marks the beginning of the end for Dell. Even analyst firm IDC couldn’t really decide how it feels about Dell’s privatisation, saying: "In some quarters, the privatisation of Dell might be seen as a step back. It is certainly true that Dell remained some way of its target revenue communicated some years ago, aiming to become a $60 billion company globally. [But] it does also mean that the company might find it easier to create the breathing space to restructure and commit to a long-term strategy without the quarterly financial rat race."
Where IDC was more strident was about Dell’s services capabilities. Despite the acquisition of Perot, IDC believes Dell has much more work to do in the consulting space: "We still believe, however, that to make it to the higher-margin space, Dell needs to add the services component: consulting services to address clients’ burning issues and capabilities to design and implement the solution. Dell has these capabilities, albeit at small scale, in Europe, but it continues to see these as a ‘wrap’ for the technology, not an integrated part of the ‘solution’ itself. Technology isn’t a solution to anything until it is packaged and fitted to the clients’ needs, and the low focus and limited success of services (apart from support) in Europe is a limiting factor. Perhaps going private will give Dell a bit more time to rethink its European services and solutions strategy to make deeper changes in how it goes to market."
So how to conclude? Is Dell’s decision to go private a good thing? Apart from a lack of shareholder scrutiny, it’s not clear exactly what Dell gains here. If it really believes in its turnaround strategy, its stock would have recovered as its results improved. According to Gladden, "We are generally very, very encouraged by the future here." It’s that one word, "generally", that should leave everyone under no illusion that Dell still has some fundamental challenges to overcome.
For the illustrious Michael Dell and his iconic firm, one can only hope that this latest move is just a new and even more successful chapter in the iconic firm’s history.
