Icahn Seen as Nothing Compared With Dell Turnaround
When Michael Dell took his company public in 1988, the personal-computer maker’s biggest competitors were International Business Machines Corp., Compaq Computer Corp. and Gateway 2000. The headstrong founder was later quoted joking that his daughter’s first words were to “kill IBM” and his other rivals.
A quarter century later, as Dell takes his Round Rock, Texas-based company private in a $24.9 billion transaction following shareholder approval yesterday, the landscape has shifted. The PC business is dwindling, leaving Dell Inc. (DELL) out of step with a technology world moving to smartphones and tablets dominated by companies including Apple Inc. and Google Inc.
This presents Michael Dell and his team a challenging balancing act even outside the pressure of quarterly earnings reports. As the company seeks to become less reliant on selling PCs, transforming into a bigger provider of hardware, software and services for corporations, it faces competitors including Cisco Systems Inc., EMC Corp. and Oracle Corp. Results in the quarters since the go-private deal was announced show that Dell’s trials are poised to deepen.
“I have a lot of respect for Michael Dell but I don’t think he has greater insights than anybody else with what to do with Dell,” said Michael Cusumano, a professor at Massachusetts Institute of Technology’s Sloan School of Management. “He’s been scratching his head for 10 years.”
Once the go-private deal closes, the scratching ends and the hard work begins. Dell plans to continue investing in PCs and tablets, especially in emerging countries, and will price products to gain market share at the sacrifice of profits. The CEO will also focus on using Dell’s server business to sell higher-margin products to corporate customers. At the same time, Dell is looking to acquire companies in the $500 million to $1 billion range, said a person with knowledge of the matter, who asked not to be identified because the discussions are private.
The shareholder vote, announced at Dell headquarters, ended seven months of jockeying between Michael Dell and financial partner Silver Lake Management LLC and investors led by billionaire Carl Icahn. The takeover of the third-largest PC maker is the biggest LBO since Blackstone Group LP took Hilton Worldwide Inc. private in 2007.
Michael Dell based his pitch for going private on the idea that he could boost spending on acquisitions, sales staff and research and development, while expanding the company’s reach in emerging countries, according to regulatory filings. Undertaking those investments as a public entity would “weaken earnings and cause greater volatility” in the stock price, Dell told the board.
“In taking Dell private we plan to go back to our roots,” Michael Dell said on a conference call.
Once the world’s No. 1 PC maker, Dell has become a patchwork of desktops and notebooks, less-than-popular tablets, plus enterprise software and data-center gear. Sales this year are expected to fall to about $57.2 billion, according to the average estimate of analysts surveyed by Bloomberg, from $62.1 billion two years ago. Operating profit may drop 20 percent to $2.4 billion.
Leading the decline are PCs, which still account for two-thirds of Dell revenue when including related products like monitors and printers. Operating income in that group dropped 71 percent in the fiscal second quarter that ended Aug. 2. From April to June, global PC shipments decreased 10.9 percent to 76 million, according to market researcher Gartner Inc., the fifth straight period of decline.
Dell’s PC strategy post-buyout represents a bet it can remain a force in that market even as sales dwindle. Its plans include pushing PCs in China and other emerging markets and, to pare costs and compete better with Apple, simplifying its longstanding build-to-order model, offering customers fewer choices. Only about 20 percent of Dell’s PC sales are to consumers while business and government buy the rest, according to Jayson Noland, an analyst at Robert W. Baird & Co. in San Francisco.
It also is emphasizing revenue and cash flow over profits, the company has said in filings, an option easier to take as a private company. Dell used to walk away from PC sales it didn’t deem profitable enough, such as the craze for $300 mini-laptops that seized the consumer market a few years ago, said Richard Shim, an analyst at NPD DisplaySearch. Now, Dell is more willing to shave prices.
“We’ve seen a strategic change at the company,” said Chris Whitmore, an analyst at Deutsche Bank AG. “In the past, they were willing to cede share in PCs to preserve margins and satisfy public markets by running it for profitability.”
For its corporate business, Dell is looking to exploit its strong market share in server computers -- now a close second to Hewlett-Packard Co. in unit shipments, according to Gartner -- as a means to selling more higher-margin software, storage and networking gear.
In June, Marius Haas, president of Dell’s enterprise solutions division, and his old boss at Hewlett-Packard, current Oracle co-president Mark Hurd, announced a deal that lets Dell customers buy servers pre-configured to run Oracle’s database and other software more reliably.
“We’re not just throwing out empty calories to pick up unit share,” Haas said recently.
Haas will be responsible for acquisitions of companies that make storage and networking gear, which he would then package for businesses with Dell servers.
Dell’s track record on enterprise-related acquisitions hasn’t been stellar. It has spent $13 billion since 2009 to buy more than 20 companies including computer terminal maker Wyse Technology Inc. and networking company Force10 Networks Inc.
Returns on those deals, meant to bolster sales of software, storage and servers to corporations, haven’t hit the company’s 15 percent target, and many have required more investment to grow, according to a July presentation by the special committee of Dell’s board overseeing the buyout.
Sales generated from these companies also aren’t offsetting the drop in PC shipments, said Noland. “Tech turnarounds are tough,” he said. “The argument is they can transform more quickly if they’re private. So far the pace at which they’ve executed a turnaround has been slower than the rate of decline in the PC market.”
Dell is “digesting” acquisitions it’s made, said Dell Chief Financial Officer Brian Gladden yesterday. “We’ve done obviously a pretty broad reset on the strategy over the last five years.”
Turning private may complicate Dell’s acquisition plans as it doesn’t have access to public equity capital markets. Its debt will rise to less than $20 billion after the buyout from around $7 billion, according to Gladden.
Dell will spend less than $1.2 billion a year to service the debt from the buyout, he said, describing the added borrowing as “incremental.”
Going private gives the company more leeway on spending and acquisitions, he said. “We can be a bit more aggressive,” he said. “You can’t just kind of go crazy and spend however you want. You still have to be disciplined.”
Michael Dell, who built his company from a dorm-room PC assembler, is also reckoning with a tough roster of competitors ranging from Apple and Lenovo Group Ltd. in personal computing to Cisco, IBM, Oracle, EMC and a healthier Hewlett-Packard in enterprise. Most of them are buying to get bigger too.
“There are a lot of CEOs who have tried to take companies private to get away from the market and rationalize the company and figure out what to do next,” said MIT’s Cusumano. “It’s an uphill battle.”
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