At the beginning of February, one of the technology industry’s most successful entrepreneurs stunned the industry with the announcement that he would be taking the company that bears his name private, in a deal worth as much as $24bn. Michael Dell, the 47-year-old multibillionaire who turned his small personal computing firm into one of the world’s leading industry players, had already been back in his old job as CEO of the company for six years before announcing his intention in early 2013.
Having launched the company as a 19 year old in 1984, Michael Dell created one of the leading providers of personal computers in the world. It dominated the market until he stepped down as CEO in 2004. Having built its reputation on a build-to-order model that proved popular with people wanting to customise their computers, Dell lost its way during the middle of the last decade, as Apple, Lenovo and HP carved up large chunks of the personal computing market.
Striking a deal
After the company suffered a rapid decline in sales and market share, Michael Dell returned as CEO and Chairman in 2007, but failed to restore the business to its former glory. Now he wants to take it private, having floated the company in 1988, in a move that is being backed by a number of private equity investors, as well as Microsoft. It is Microsoft – which is going through something of a transitional period itself – that is the most intriguing.
Microsoft and Dell have suffered in recent years from their slow and muddled reactions to the changing personal computer market
The deal struck in February will see Michael Dell partner with private equity group Silver Lake, Microsoft and a number of banks to take the company private, pending shareholder approval. The founder will contribute his existing $3.7bn stake, as well as an additional $750m, while Silver Lake will put in $1.4bn in equity. Microsoft, who will be keen to keep one of its more prominent clients afloat, is contributing $2bn.
It’s speculated that Michael Dell sees the taking of his company off the stock market as a way in which it can develop new products without the constant glare of shareholder scrutiny and market reactions. Having to make quarterly reports about the strategy of the firm and then suffering the whims of investor sentiment on the markets has not been kind to Dell, with the stock price tumbling in recent years.
After the deal was announced, the company’s biggest rivals were quick to give their opinions on what it meant for their businesses. HP released a statement saying Dell “faces an extended period of uncertainty”, and it was well placed to capture any concerned customers: “With a significant debt load, Dell’s ability to invest in new products and services will be extremely limited. We believthat Dell’s customers will now be eager to explore alternatives, and HP plans to take full advantage of that opportunity.”
Addressing the opposition
Brian Rogers, Chief Investment Officer of T Rowe Price, Dell’s second-largest external shareholder, was opposed to the deal, saying: “We believe the proposed buyout does not reflect the value of Dell, and we do not intend to support the offer as put forward.”
Southeastern Asset Management, the largest outside investor in the company, also opposed the deal. The firm said in a statement: “We would have endorsed a transformative transaction that would have provided full and fair value to Dell’s public shareholders, including a leveraged recapitalisation or a go-private type sale where current shareholders could elect to continue to participate in a new company with a public stub.”
“Unfortunately, the proposed Silver Lake transaction falls significantly short of that, and instead appears to be an effort to acquire Dell at a substantial discount to intrinsic value at the expense of public shareholders.”
Influential hedge-fund manager David Einhorn also aired his strong opposition to the buyout, describing the plan to take the company private as ‘cash hoarding’. Einhorn’s Greenlight Capital had a large stake in Dell last year, although this was later sold. Dell’s stock price fell after shareholder frustration at the company’s strategy, which Einhorn says helped Michael Dell in his buyout plan.
Einhorn added: “Michael Dell probably didnít mind the stock falling. Now he wants to take Dell private and voila, the balance sheet will be fully utilised to finance his purchase of the company.”
Both Microsoft and Dell have suffered in recent years from slow and muddled reactions to the changing personal computer market. Dell has struggled to remain relevant in the advent of mobile computing and the decline in use of Windows-based computers. As devices become increasingly mobile, Dell has failed to match the hardware innovations of Apple, while Microsoft was slow in anticipating the entrance of Google into the operating system market place.
Microsoft needs a strong player still invested in its operating system
Dell built its reputation as a PC manufacturer, and it is this market that presents it with the most problems. People are no longer tied to its office computers, with more and more using tablets or remotely accessing work data from their home computers. Dell has not really offered a compelling reason for people to stick with its customised computers, and as people become less attached to the Windows platform, the company finds itself propping up a part of its business that is losing customers.
The decision to focus on the higher margins supposedly gained from high-end computers, like its XPS and Latitude ranges, appears misguided as mobile computing continues to be the industry’s main source of growth.
One area the company may look to focus on is upgrading the existing computers of its corporate clients. Dell’s Chief Financial Officer, Brain Gladden, told investors in an earnings call that many of these customers were on old platforms that required a refresh, and Dell would likely focus on serving them.
He said: “I think that’s really tough to get at, but the data that we’ve seen would suggest there’s still somewhere in the range of 40 percent of the corporate installed base for PCs that is XP or Vista, that needs to be upgraded. So that’s, I think, pretty consistent with the data that we see for our installed base, and for what we hear from our corporate customers.”
In fact, Microsoft will cease offering support to its old and still widely used Windows XP operating system in early 2014, meaning Dell could see a considerable amount of new orders for office computers in the coming year. Gladden added: “All the data that weíve seen, all the conversations we’ve had with customers, would lead us to believe that there’s still a significant refresh activity that has to happen in the next 12 to 14 months.”
The fact that Microsoft has heavily endorsed Michael Dell’s buy-out bid shows how important the company is to its business. As HP retreats somewhat from the PC business, Microsoft needs a strong player still invested in its operating system. Michael Dell has been enthusiastic in his praise of the new Windows 8 operating system, saying in December: “…in the customer conversations that weíve been having, the interest in Windows 8 is quite high, even with commercial customers, who would normally wait a few releases to adopt the new versions.”
He added: “With Windows 8 products… we’re pleased with the incredible experience that [customers] expect, while you get the security and versatility and reliability that your enterprise really requires.”
Aside from software, Microsoft might be eager to make a push into the hardware market, and a heavy investment in one of its biggest clients could signal a greater partnership between the two, in which products are developed together. Google recently announced its own laptop computer, while Apple has been hugely successful offering both computers and the operating systems that run on them. Tighter integration between the two firms – with Dell computers perhaps offering a customised Microsoft experience with advanced features unavailable on rival platforms – could be a way in which the two firms experiment in the future.
While it has struggled to make a dent in the competitive mobile computing market, Dell is expected to make a big push in offering Windows-based touch-screen computers. At the Mobile World Congress 2013 trade show in Barcelona at the end of February, the companyís vice president, and general manager of tablets and performance PCS, Neil Hand, was bullish about Dell’s range of products, telling reporters: “At Dell, we have – unequivocally – the most secure, most manageable and most reliable product portfolio in the industry.”
Hand added that the new tablets unveiled, including the enterprise level Latitude 10 Enhanced Security edition, would help the company to challenge Apple’s dominant iPad. He said: “What I’m proud of is we’re bringing that same kind of resilience and capability to our tablet products as we do to our traditional Latitude and OptiPlex desktops and laptops.”
The company is aiming squarely at the corporate market with its security-focused new tablet, boasting a fingerprint reader and a smart card. With tablets becoming more popular among business executives, Dell hopes its new Latitude 10 will attract IT departments that want to maintain a link between its Windows infrastructure and employeesí mobile devices.
Servers and networking
Another area the company has dedicated considerable resources to is providing servers and networking to corporations. In recent years, the management has spent over $12bn in buying smaller firms in a drive to offer a comprehensible enterprise IT solution, and it seems as though it is starting to pay off. In February, the company reported that revenues for its servers, led by its Xeon-E5 PowerEdge 12G, grew by 18 percent to $2.62bn. Its networking products increased by 42 percent, although its storage range dropped eight percent.
If Michael Dell is going to reinvigorate the company that bears his name and made him his fortune, then a focus on being the most trusted enterprise-computing provider is the best way to go about it. The company should not try to compete with the likes of Apple and Google in the consumer space, and instead tighten its relationship with Microsoft, and push ahead with its long-term end-to-end business.
According to Krista Macomber, an analyst at Technology Business Research, this strategy is likely to continue and the imminent privatisation will likely enhance it. She said: “Privatisation will enable Dell to align all of its assets around its end-to-end solutions strategy, as it will allow Dell to act strategically on a longer time horizon than the current quarter without the scrutiny of Wall Street. As a relative newcomer to the enterprise, and in delivering end-to-end solutions, Dell faces more work in its journey.”
“Dell’s continued evolution into a provider of end-to-end IT infrastructure is a long-term endeavour that requires heavy investment in R&D and acquisitions, calculated alterations to its go-to-market approach, and corporate revenue pressures in the form of declining PC scale ñ as demonstrated by the company’s fourth quarter financial performance and impending privatisation.”