It's been four months since Michael Dell, along with Silver Lakes Partners offered a proposal to take Dell (DELL) private at a price of $13.65 per share. This valued the deal at $24.4 billion. I thought this was a suitable offer for a company that has grossly underperformed over the past five years. Today, Dell is actually trading below the offer price, which plays in Michael Dell's favor.
While the cynic in me, never really believes that privatization will make much of a difference fundamentally for Dell, I'm willing to consider that it's better than the status quo. Besides, one thing it will do is shield Dell from much of the scrutiny that the company is experiencing today. But after another disappointing quarter as a public company, there's no place to hide. And if investors don't act quickly, more leverage will be lost as the company's financials continue its decay.
Another disastrous quarter
With nearly two-thirds of the company's revenue still predicated on the strength of the PC industry, there wasn't much that was expected from Dell this quarter. That said, I was nonetheless disappointed that the company managed to still miss expectations that were already lowered. Dell posted earnings of $130 million, or 7 cents per share, falling 80% year over year.
Remarkably, even when excluding certain items, which boosted earnings per share higher to 21 cents, Dell still would have been 40% short of Street estimates of 35%. This is an enormous deficit even for Dell, which has been marred by one disappointing quarter after the next. Revenue arrived at $14.1 billion, falling 2% year over year. This was slightly better than Street estimates by roughly $600.
This is where the company's non-PC side of its business, which grew 12% year over year, stepped up with some great contributions -notably, from Quest Software, which Dell acquired last September. Unfortunately, these businesses, which includes enterprise services, which grew 10% year over year, is not nearly enough to offset the PC-dependent deficits that this company still faces, particularly for laptop machines.
What is there left to lose?
The arrival of tablets and mobile devices that have "laptop-like" functions, have killed off PC demand. For that matter, the mobility portion of Dell's PC operations, which consists of laptops, plummeted 16% from last year - posting revenue of $3.6 billion. But Dell can reverse this trend. I've made this case once before, Dell should consider acquiring BlackBerry (BBRY).
Dell showed that it still has a strong enterprise business. With BlackBerry in the mix, Dell can leverage the things that both companies do well to stop Dell's bleeding. Along with BlackBerry's Mobile Fusion, Dell will be able to transform itself more in the realm of IBM (IBM). At the same time, Dell will remove its dependency from Microsoft (MSFT), which has seen weak adoption of its Windows 8 operating systems. Given BlackBerry's resurgence, Dell would then have no reason to go private.
In that regard, if the company is truly sincere about doing what is best for shareholders, Dell must consider this. Would Carl Icahn be in support of this move? Given BlackBerry's ability to generate solid cash flow, including $2.3 billion in the recent quarter, it's tough to argue against this. And with BlackBerry's market cap of just $7.5 billion, this is a deal that Dell can afford, given that the company ended the recent quarter with $13.2 billion in cash.
Dell wants to go out on its own terms - albeit not on a winning streak. But Michael seems to have a plan. With a 13% decline in global PC demand weighing down on a company that is still heavily reliant on PCs, Dell's first quarter results didn't necessarily inspire confidence that the company should maintain its public course.
At this point, what's really left to lose? This is what investors have to ask themselves. Is there a point to holding on to the idea that this company can suddenly reemerge out of this funk. There's no magic potion. And as much as I respect Carl Icahn and the fight he's putting up for shareholders, along with Southeaster Asset Management, miracles aren't going to happen. I don't think it's a CEO-specific deficit that Dell is dealing with.
The industry has changed. Unfortunately, Dell failed to adapt quickly enough. But it's not alone in that misery. Dell's OEM partners Microsoft and Intel (INTC) are feeling similar pressures. Besides, it's not as if PC rival Hewlett-Packard (HPQ), which has had five CEOs since 2005, has been blowing the doors off, either. This is a PC-industry phenomenon. And Dell needs a radical move to reverse its course. It needs to stay public and call Canada.