Dell Sees PCs Poised for Sale by HP as High-Margin Ticket: Tech

Five years ago, Dell Inc. (DELL) lost the title of world’s top personal-computer maker to its longtime rival, Hewlett-Packard Co. (HPQ)

So when Hewlett-Packard surprised the world by announcing it would consider divesting its $41 billion PC business, Dell’s founder and chief executive officer, Michael S. Dell, quickly took to Twitter.

“Goodbye HP,” he wrote. “Sorry you don’t want to be in PCs anymore.” He expanded on his message in a late August interview. “We like the PC business, and we’re staying in it,” said Dell, 46.

Whether No. 1 or No. 2, it’s a dubious distinction to be one of the biggest suppliers of machines now considered products of a bygone era, as the computing world moves on to tablets and mobile devices. Still, Dell sees the business he once dominated as a springboard to greater things, Bloomberg Businessweek reports in its Sept. 12 issue.

Through a string of 10 acquisitions in less than two years, Dell has branched into areas such as information-technology services, computer networking and data storage. He thinks the kind of low-cost, low-margin hardware Dell is known for -- the company sold about $39 billion worth of desktops, laptops, and related products last year -- can open the way for sales of higher-margin enterprise products.

‘Pruning the Business’

At the same time, and in a nod to reality, Dell is winnowing its troubled line of consumer products and focusing its attention on the small and medium-size businesses and government agencies that already account for more than half its sales.

“Some of this we kind of did to ourselves,” Dell said in an interview in Round Rock, Texas, where the company is based. “We are consciously pruning the business,” he said. “We’re replacing a lot of low-margin revenue with a lot of high-margin revenue.”

Dell is under pressure to make the shift. The company is expected to make less in profits this fiscal year than it did in fiscal 2006. Analysts on average predict the company will have $3.7 billion in profit for the year ending in January, according to Bloomberg data. The company’s shares have lost 41 percent since Jan. 30, 2007 -- the day before Michael Dell ousted former CEO Kevin Rollins and returned to the helm, which is in part a reflection of Wall Street’s skepticism about his strategy.

“It’s hard to say he’s come in and saved the company like Steve Jobs at this point,” said Jayson Noland, an analyst at investment bank Robert W. Baird.

Aiming at Middle

The consumer market has been vicious to everyone but Apple Inc. (AAPL), and Dell whiffed a few times too many: Its Adamo computer, a $2,000 high-design laptop that launched with a splashy ad campaign two years ago, failed to find many buyers, and last month the company killed off its oddly shaped 5-inch tablet, the Streak.

PC sales are also stalling. Gartner Inc. now predicts global shipments will increase 3.8 percent this year to 364 million machines, down from the market researcher’s previous forecast for 9.3 percent growth.

On the other end of the scale, enterprise giants such as International Business Machines Corp. (IBM), Cisco Systems Inc. (CSCO), Oracle Corp., and Hewlett-Packard already hold sway over data center sales to big businesses.

By focusing his company’s efforts on cost-conscious IT officers at organizations with 100 to 5,000 workers, Dell is betting it can stay out of its larger rivals’ cross hairs while avoiding the expense and risk of keeping up with consumers’ whims.

Buying Direct

David Johnson, the head of mergers and acquisitions at Dell, said recent purchases such as Compellent Technologies Inc. and Force10 Networks Inc. will let Dell offer its existing PC customers technology to move, store and analyze their data. It’ll be less complicated for them to buy directly from Dell, he says, than from resellers used by IBM, Hewlett-Packard, and Cisco.

The direct approach means “we’ll attain more margin, but the value the customer gets will also be greater,” Johnson said.

In smartphones and tablets, the company plans to augment Microsoft Corp.’s Windows and Google Inc.’s Android software with its own security software to keep corporate data walled off from users’ personal applications, a move to woo cautious IT officers.

Cloud Computing

Yet even after those acquisitions, Dell is either way behind or absent in many of the high-margin enterprise technologies now in demand, including data-analysis software and cloud computing. In the first week of September, IBM acquired two data-analysis software companies in as many days, and Hewlett-Packard agreed to buy enterprise-search company Autonomy Corp. for $10.3 billion on Aug. 18. Cloud-computing services from Amazon.com Inc., Microsoft and other companies are replacing traditional server sales, instead letting users tap computing power over the Internet.

And then there’s Dell’s reputation.

“A lot of enterprise wants a fairly sophisticated vendor, and Dell’s not that,” said Noland. “They’re the low-cost vendor.”

Shedding Dell’s image as the cheapest box builder is an ongoing effort, Johnson says.

“It takes time to change the perception of a company,” he said.

Michael Dell, for one, isn’t concerned about the wait.

Said Dell: “I think 46 is still pretty young.”

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

To contact the editor responsible for this story: Barrett Sheridan at bsheridan3@bloomberg.net

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