Dell Seeks `Transformation' as Stock Slips, Rivals Bulk Up Through Deals

In the 3 1/2 years since Michael S. Dell resumed running Dell Inc., the computer maker he founded 26 years ago, he has made more than 10 acquisitions, cut 10,000 jobs and hired executives from Motorola Inc. and Nike Inc. to put some flash in the company’s products. Dell bought Perot Systems Corp. for $3.6 billion last year to expand into computing services.

None of that has worked very well, Bloomberg Businessweek reports in its June 21 edition. The stock has fallen 42 percent since Jan. 30, 2007, the day before Dell returned from semi- retirement. Over that period, Hewlett-Packard Co. has gained 11 percent and IBM Corp. is up 31 percent.

Slumps happen. There’s less precedent for Dell’s statement before an audience of investors and analysts on June 3 in New York. An analyst asked him if he’d ever thought about taking the company private: “Yes,” he answered. There was silence in the room, and Dell declined to answer more questions on the matter.

“When companies talk about going dark, typically you think about small companies with problems,” said Jarrad S. Zalkin, a vice president at investment bank TM Capital Corp. in New York. “You don’t think about a company like Dell.”

Spokesman Jess Blackburn declined to talk about Dell’s statement. Michael Dell also declined to comment.

Dell, 45, founded the company out of his University of Texas dorm room and built it into a model of manufacturing efficiency. Executives from other companies would visit its Round Rock, Texas, headquarters to see how he did it.

Software, Services

A lot has changed since then. The industry’s focus has shifted toward mobile computing, software and technology services. IBM and Hewlett-Packard have made big commitments to software and consulting, much higher-margin businesses than building and selling personal computers.

Dell still gets 24 percent of its revenue from desktop PCs. Even after the Perot Systems acquisition, services account for only 13 percent of its sales. Cisco Systems Inc. is angling for a piece of Dell’s $6 billion server business. While Dell introduced a tablet computer called Streak in May, it didn’t steal much thunder from Apple Inc.

“This transformation is incomplete,” Dell said at the June 3 investor conference.

Some analysts say Dell needs a deal on the scale of Hewlett-Packard’s $13.2 billion acquisition of Electronic Data Systems Corp. in 2008. Shaw Wu, an analyst with Kaufman Bros. LLP in San Francisco, said one promising match might be Silicon Valley’s Juniper Networks Inc., which makes routers used by phone carriers and cable companies. The market for such networking equipment is $7.1 billion.

‘Do Something Dramatic’

“They need to do something dramatic, something crazy,” Wu said.

The problem with pursuing acquisitions is that money is becoming tight for Dell. Sales fell 13 percent to $52.9 billion in the fiscal year ended Jan. 29. On June 10, Dell set aside $100 million of its first-quarter profit for a potential settlement with the U.S. Securities and Exchange Commission over the computer maker’s relationship with Intel Corp. Both companies declined to give more information on what the SEC is investigating.

Going private and escaping investor scrutiny might give Dell the time and flexibility to develop its service business so it could compete better with IBM and Hewlett-Packard, said Zalkin of TM Capital.

“You can move much more boldly as a private company,” he said.

Still, taking the computer manufacturer private would be expensive. Dell has a $27.4 billion market value, and technology companies typically fetch a 25 percent premium when they’re sold, Zalkin said. Other analysts and bankers question whether going private would solve any of Dell’s bigger problems.

It “really doesn’t change anything, because the fundamental disadvantages don’t go away,” Kaufman’s Wu said. “The competitors are still there.”

To contact the reporters on this story: Connie Guglielmo in San Francisco at cguglielmo1@bloomberg.net; Aaron Ricadela in San Francisco at aricadela@bloomberg.net.

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