Dell – Going Private To Reinvent (And Save) Itself
Dell Computers is having an identity crisis that mirrors the problems with the larger PC industry.
Long a ruthless, sorry relentless supply-chain innovator, Dell’s direct-to-customer model upended the PC industry once upon a time. Without expensive retail displays and margins to give up to retailers, Dell was seen as someone that could customize PCs exactly the way customers wanted and get them into customers’ hands in a matter of days.
In business terms, you could say that its competitive advantage lay along the twin dimensions of “variety” and speed. Cost too, some may argue, but I never found Dell PCs particularly cheap, especially after I was done customizing them.
Anyway, that was then.
Over the last few years, the PC became mega-commoditized. A LOT of players, most of them with deep supply-chain expertise such as Lenovo and HP, were competing for the same business and non-business customers. And more than anything else, there just weren’t that many PCs being bought. Laptop sales were not enough to offset the decline in PC sales. Then in the last couple of years, the meteoric rise of Tablet PCs put paid to any lingering hopes for a rebound in PC sales.
Dell, of course, hasn’t stayed still. It has been acquiring various other customers and trying to become a version of highly successful IBM and perhaps-successful-someday HP:
…The company’s strategy hasn’t looked all that original. It’s essentially trying to become more like IBM (IBM) and Hewlett-Packard by having a more diverse product and services portfolio. Its rivals, though, headed in this direction years ago. Dell has argued that it can cater to smaller and midsize companies better and perform services work, for example, cheaper than its much larger competitors.
But unfortunately for it, when you are publicly traded, shareholders’ appetite for dramatic change, the kind that Dell is attempting, is very hard. Better for Dell to go private, away from analysts’ prying eyes, the distractions of a shaky stock price and pesky compliance and reporting issues, and do what it takes to reinvent itself.
Large, successful companies have a strong record of doing that in the US and benefit from an infusion of capital (not sure if Dell needs it), a quick exit path for majority shareholders (again, not sure if Michael Dell needs it…knowing his career track, I don’t think he will not cut and run anytime soon) and the ability to slash costs and (more) easily divest of non-performing business units.
The Wall Street Journal reports that a deal may be struck within 6 weeks…So why the sense of urgency, considering that these rumors have persisted since 2000? Looks like its all about its low “off the charts” valuation – a 30% decline in its stock price in 2012…though part of that was reversed by today’s 13% surge.
Oh and btw, here are some reasons why Dell may NOT go private…primarily because Dell’s market cap, at $21B, is still too high for an LBO deal. http://blogs.wsj.com/marketbeat/2013/01/14/dell-buyout-rumors-possible-but-not-likely-analysts-say/?mod=e2tw
Three excellent add-ons from Dan Primack:
*** Dell #1: Katie Benner reports this morning that TPG Capital is no longer interested in buying Dell Inc. In fact, it seems that TPG hasn’t been in the picture for quite some time. Seems that Dell reached out to both Silver Lake and TPG –with each firm doing independent due diligence — but only Silver Lake kept moving forward. Katie also makes a strong case that any potential buyout of Dell is fraught with an inherent problem: The continued, central involvement of Michael Dell. Read her full piece here.
*** Dell #2: So if TPG isn’t involved, how would Silver Lake fund this thing alone? After all, the firm would be hard-pressed to even invest $1 billion of its own capital. Word is that it’s got at least one big sovereign wealth fund interested, likely from Asia or the Middle East (Canadian pensions are possible, but less likely because they’d demand board representation). More importantly, Michael Dell himself could contribute cash – something I probably should have paid more attention to in yesterday’s analysis.
Dell’s fortune is managed by an investment group called MSD Capital, which in 2010 had around $12 billion in AUM. I’m not sure if that does or doesn’t include his Dell shares, but even removing that value means he could contribute billions. Plenty of offset TPG and fill out the equity tranche (so long as he’s comfortable doubling or tripling down).
*** Dell #3: Katie obviously thinks Silver Lake would be taking an unwise risk betting on Michael Dell to turn his company around as a private entity, given his recent inability to do so as a public one. I don’t know enough about Dell’s business to take sides on that, but do have a more PE-centric question: Where is the exit?
Dell is probably too big to be acquired, so long as it gets more valuable post-buyout (if it loses value, then the exit is probably at a loss and this exercise is irrelevant). So that means an eventual IPO. But if Michael Dell’s primary reason for taking the company private – and putting up billions of his own fortune to do so – is because he strongly dislikes the prying eyes and criticism associated with being publicly-traded, how do you get him to do a road show in 2017 or 2018?