Dell Troubles Continues
The recent pulling out of Blackstone from its bid to acquire Dell, after due diligence, siting the reason that the PC market is not a safe bet to play, raised further eyebrows regarding Dell's future and added insult to the injury caused by the Dell's on-going boardroom saga to assume company ownership. This story is making waves in both the financial and technology sectors.
Initially, the main contenders were Michael Dell, Blackstone Private Equity Group and veteran venture capitalist Carl Icahn. Dell has joined hands with Microsoft and Silver Lake to buy back company shares at $13.65 and go private, whereas Icahn is offering $14.25 and the best proposal was from Blackstone at around $15/share. But Blackstone has dropped out from the race, mainly due to the tumbling PC market. Experts are also blaming Blackstone's recent low growth for their pull-out.
For the business and technology world this has been in the offing for a long time, but to admirers of Michael Dell, who start his business from his garage as a teenager and singlehandedly turned it into a multibillion dollar business, it is a huge disappointment to see such a public company ownership fight! We have therefore analysed this further and tried to figure out where this beloved company might end up in five years' time!
What went wrong with Dell?
The very foundation of Dell as a company was laid on a strong supply chain and ecommerce model, where the company assembled PCs and hardware with very tightly run manufacturing units and sold them online. However, with the evolution of technology and increasing competition, the company somewhat lost its way.
These are some of the ways in which this happened:
- Dell get too cocky (e.g. taking micky out of Steve Jobs/Apple and the subsequent rebuff)
- Failed to expend their product line beyond PCs
- The Enterprise business is too server focussed and failed to leverage virtualisation, cloud and data storage technology
- Asset and liability ratio is very high, which is limiting the company's ability to raise funds or expand
- The company is perceived as a PC seller and the PC market has had a steep downfall in the wake of smart phones and tablets
And this all reflected in reduced turnover, falling share price and, unfortunately, unrest among shareholders. It also triggered a typical power struggle and gave an opportunity to parties with vested interests, including Michael Dell, Blackstone, and Icahn, to come up with separate new plans to reinvigorate the company.
Michael Dell's Plan is to beef up R&D, focus on enterprise and emerging markets
Since 2008, Michael Dell has taken back CEO responsibilities and he is pushing for high profit margin on PC sales and consolidating the enterprise offering with cloud, data storage, security and networking by buying appropriate add-on businesses. In a recent memo to shareholders he has insisted that the answer is to beef up customer services, R&D and Enterprise Selling to bring back to old glories. This is a summary of his memo:
- Extend end-to-end information technology solutions capabilities.
- Hire additional sales personnel.
- Compete aggressively in emerging markets.
- Invest for growth in the PC and tablet business.
- Accelerate delivery of a simplified and enhanced customer experience.
And Icahn will go for full divestitures
Carl Icahn hasn't gone public with his plan,but if we believe in the rumours
and Icahn's history, and that of private equity and venture capitalists taking over failing companies, the plan would probably be to break up the company by selling both sick (PC business) and money making (Dell Finance) units, in order to appease shareholders with some dividends, pay debt and focus on the potential cash cow i.e. the enterprise business!
Experts like Carl Icahn's plan
According to industry pundits, the Icahn offer is more practical as they do consider a number of factors, such as that PC market is dyeing, that Dell is perceived as a PC seller and Dell's liability and asset ratio to be important. Therefore it would be very difficult for Dell to revive all its businesses units.
As well as this, Michael Dell's proposal to combine the R& D and Enterprise businesses might not be very fit in the short run, as designing a future product or cracking substantial business deals takes time.
But Michael Dell has a point
If we look at Michael Dell's proposal , it is aiming for long-term gain for both the business and shareholders. For example, for the PC unit he is targeting a high profit margin and inroads to emerging markets, and for the enterprise business a more end-to end solution with cloud, data storage, infrastructure setup and security.
Some aggression may be needed from Dell
The only issue might be that Dell is trying to do all of this in-house i.e. acquiring start-ups and creating offerings that could be lucrative in the long run; but in all this Michael Dell is forgetting that the biggest challenge is to quickly change public perception of the company in the aftermath of this very public power struggle. That can be achieved by strongly positioning the company in all sectors. For example:
- In the B2C market, Dell should 'do an Amazon' i.e. leverage their supply chain and ecommerce capabilities to sell other products e.g. Smartphones, Tablets and TVs.
- In the enterprise business, a tie-up with Microsoft, recently equipped with Skype, Yammer, SharePoint, BizSpark and Azure, to provide an end-to end cloud based low cost scalable solution.
- On the R&D side, to beef up next gen products, 'do a Google'; Google bought Motorola Mobility to strengthen their mobile capabilities and Dell could buy a next generation patent from IBM, HP or Sony, and hire designers and engineers from Apple, Google or Facebook to quickly launch new products ranging from smartphones, to any wearable technology or even 3D printers.
Overall, the company might be safe with Michael Dell but it needs an urgent overhaul
For shareholders, the easy buy-in would be the Icahn offer, but I think Michael Dell deserves a chance as he knows business, he is backed by the right people (Microsoft) and his plan is also looking in the right direction. However he might need to quickly react to position the company beyond its image as a PC and server seller, by launching new product lines, tie-ups with some major enterprise players and leveraging the existing supply chain and ecommerce capabilities.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.