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All’s well that ends Dell: going private won’t save struggling PC maker

Dell’s decision to sell itself to CEO Michael Dell and technology investment firm Silver Lake has sent analysts into a frenzy of deconstruction to try and make sense of what it actually means. Shareholders…

Founder of PC manufacturer Dell, Michael Dell, has announced that the company will go private in a $24.4 billion deal — the biggest leveraged buyout since the GFC. AAP

Dell’s decision to sell itself to CEO Michael Dell and technology investment firm Silver Lake has sent analysts into a frenzy of deconstruction to try and make sense of what it actually means. Shareholders will receive $13.65 in cash for each share which is now about 10 cents above the market close, valuing the company at approximately $24.4 billion. CEO Michael Dell will contribute his 14% of Dell shares as part of the offer. The other notable part of the sale is that Microsoft is lending $2 billion to part-finance the purchase.

Appearance is everything

So what does it mean for Dell and its customers?

On the US markets, they may claim that company fundamentals are important but appearances are everything. Apple’s meteoric share price rise and fall over the past year has highlighted the extreme fickleness of Wall Street’s affections for a company. Like all aspects of society, attention spans have shortened to YouTube video lengths. If you aren’t constantly “wowing” market analysts, you will lose their attention and, ultimately, their support.

So it has been with Dell. Not only have they failed to “wow” the market with their products, they have been mixing with the distinctly unfashionable crowd of enterprise IT companies like HP and IBM. From a market perspective, their share price has been on a steadily downward trend from a post-Internet-bubble high of $42 to its currently parlous price of around $13.

The disadvantages of being a public company

As a company, when you are constantly judged by your performance on the financial markets, it can’t help but affect your underlying business. It will eventually affect how your customers perceive you. Worse, internally, staff’s time and energy goes into concerns about stockholders and short-term effects rather than necessarily worrying about what is in the best interest of their customers or the company.

For a company whose stock price is largely static, you lose many of the advantages of having tradeable stock. You can’t use it as a financial incentive for your own staff, for example. Stock options have no value if the price doesn’t increase. If you are like Microsoft, and decide to pay dividends on the stock in lieu of the stock’s poor performance, money is going out of the company that could be used for further development or investment.

However, going private will leave Dell with $15 billion of debt that it has to service, and so it has swapped the scrutiny of the markets for scrutiny of the banks.

The Microsoft connection

The fact that Microsoft is involved in this deal with a $2 billion loan has been read as Microsoft’s attempt to shore up a declining PC market. Dell’s financial results have highlighted the precipitous drop in the consumer PC market and this has had an impact on Microsoft’s sales of Windows 8, which are still growing slowly. Microsoft has wanted to increase its control over the hardware side of its business. Investments in Nokia and the release of its own tablets have signalled how much CEO Steve Ballmer would like Microsoft to follow in Apple’s footsteps. The challenge for Microsoft is to do this without annoying other manufacturers, who see Microsoft’s interference as direct competition. The consequences of this are already apparent. HP has joined Samsung in shipping a notebook computer powered by Google’s Chrome OS. Last year, manufacturers like Samsung cancelled plans to build and promote the Microsoft Surface RT tablet.

With closer ties to Microsoft, Dell may not be in a position to act as independently of Microsoft.

Plan X in the works?

Along with musings of whether Dell will use its private status to sell off parts of the company, notably its consumer division as IBM did with its PCs, some have wondered whether Dell’s move will enable it now to take risks and innovate. Even if this is the plan, it is unlikely to work. Dell has historically been recognised for its innovation in allowing customers to easily buy customised and good value PCS and computer equipment online. At the height of the PC market, this propelled Dell to its prominent position in the consumer PC market. Outside of this however, every time Dell has tried to extend its product range into other consumer devices like mp3 players, tablets and phones, the results have been less than ordinary.

Nothing about going private will fix Dell’s inability to do anything other than what it already does.

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3 Comments sorted by

  1. Ben H

    logged in via email @gmail.com

    Or, it could just be that the bloke who knows his company better than anyone else thinks Wall St undervalues it and he's acting accordingly. (A cynic might think this is because Dell don't shift ever-greater amount of shiny consumer trinkets that anaylsts and social media types tend to fixate on). Dell's enterprise business is in much better shape than the consumer side of things.

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  2. Doug Robb

    Director at Clarity Software Pty Ltd

    Nice article David food for thought although like Ben I think the enterprise business has a lot of upside. Analysts seem to think the desktop is dead which is a long way from the truth. In 2008 Microsoft were happy to offer $45 billion to buy Yahoo so $2 billion is small change. No matter how many phones/tablets consumers buy the desktop/server market (ie real keyboard, a screen you can actually work on all day, massive storage, fast processor etc) is going to drive the enterprise and out perform. Hell a lot of people at home want that too! This is probably a good time for Dell to get back in the game while the market is consolidating and Microsoft is willing to share some of the love .....

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    1. Gavin Moodie
      Gavin Moodie is a Friend of The Conversation.

      Adjunct professor at RMIT University

      In reply to Doug Robb

      @ Doug Robb

      I hope you're right. I've depended on lap tops since the 1990s. I haven't found phones and tablets to be much use for computing 'cept as toys, and have been feeling archaic recently.

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