Dell M&A: Cause Or Cure?

| About: Dell Inc. (DELL)

A couple of months back, Merjerz wrote about Dell's (NASDAQ:DELL) M&A record (read it here), in which we summarized that Dell had spent well over $10B on M&A, trying to transition away from PCs to enterprise solutions and services, with limited success that really does not justify the cash invested in these deals.

Three important developments further support the case that Dell is undergoing a major strategic revision in recognition of its failed M&A strategy.

First, Dave Johnson, the man in charge of Dell's M&A over the last three years, and for all business development for the last two years, is leaving Dell for Blackstone. Johnson, who reported directly to Michael Dell, has been the mastermind behind Dell's massive shopping spree. He's not one to change jobs too flippantly - he spent the previous 27 years at IBM - and one has to wonder if his departure is not a strong statement about the mostly negative effect $10B of M&A has had on Dell.

Second, talk of Dell going private is of course a strong reflection of the undeniable fact that things are not going too well at Dell. Dell apparently wants to go private, so it can reorganize away from the stock market scrutiny that is putting the entire company under such pressure, and reemerge further down the line with a new strategy and better performance. Dell's strategy shift is already happening, but it is happening at a glacial pace that investors don't really tolerate. Dell's CFO recently said that Dell sees "progress in the strategy of transforming the business… For us, patiently executing and seeing steady progress is what we're doing." Well, apparently, Michael Dell has a little more patience than investors. Even after its shares soared on the LBO rumors, Dell's stock is down about 20% over the last twelve months, compared with NASDAQ's 15% rise.

Third, Dell has continued to miss revenue and earnings estimates, but also to lose market share. This suggests that the company is seriously underperforming its peers. The company conducts negligible R&D as a portion of revenues, compared with peers such as HP (NYSE:HPQ) (2x), IBM (NYSE:IBM) (4x) and Cisco (NASDAQ:CSCO) (9x), such that its main engine of growth - M&A - is plainly not pulling its weight on the company's performance, at least not in the right direction.

Apart from going private, two possible avenues to reinventing Dell suggest themselves.

The first is to work on incremental shifts to improve Dell's move to services. A couple of acquisitions that could help are: Dell-Carbonite (NASDAQ:CARB), a small deal that would give Dell a new service to add to its solutions and services division; Carbonite is bleeding cash at a pace, but its revenues are growing fast. Dell could invest in and grow this fast growing niche. A much bigger deal would be Dell-RiverBed (NASDAQ:RVBD), which would create a whole new market position for Dell, and put Dell in competition with VMWare, and Cisco, with a compelling product offering in WAN performance.

An alternative, is to do a drastic M&A deal, such as Dell-NetApp (NASDAQ:NTAP), which would drastically alter Dell's structure and business model. Dell trails EMC in this space, but this big acquisition would catapult Dell into a leadership position. It would also give Dell-NetApp a shot at taking significant share from HP which increasingly looks like it's slowly going into terminal decline in the services space. This one huge acquisition could very quickly make Dell the services company it so desperately wants to be.

Either way, Dell may need to invest a lot more in R&D rather than M&A. Despite protestations that it now has a first-rate M&A deal team and process, it seems not to be helping much, and certainly not fast enough. If 'buy' isn't working, perhaps Dell should be investing more in 'build.'

Overall, we're satisfied users of Dell's product (this is being typed on an XPS), and we'd like to see the company turnaround, whether under the cover of an LBO, or with a transformational M&A strategy, or with newly rebuilt R&D capabilities.

Disclosure: I am long DELL, CSCO, IBM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.