Michael Dell has done it! Defying skeptics, he arranged a deal for Dell Inc. to go private, making the bold moves necessary to return the company he founded to its former glory. Or as close as it can get.
In an interview, Michael Dell was clear about the challenges as well as the opportunities ahead. “We have a lot of hidden assets in the company that have not been coming out,” Dell said. Acknowledging that the company hasn’t done the best job recently, he added, “Dell is in a time when we really need to unify the leadership structure, simplify it, focus it, and really execute,”
Oh, wait a second. No, sorry. That wasn’t from an interview with Michael Dell today, when the company announced its $24 billion leveraged buyout. It was from an interview in January 2007 – more than six years ago – when Michael Dell made a triumphant return as the company’s CEO. But you have to admit, those words feel as fresh as if they were spoken this morning.
There are many comparisons being made today between Michael Dell and Steve Jobs, given regrettable comments Michael Dell made years ago and the similar narratives of two founders returning as CEOs to revive ailing PC makers by branching into new markets. But there are important differences as well. Apple succeeded by reinventing or defining nascent markets of music players, smartphones, and tablets, while Dell is wedging its way into an already crowded enterprise software space.
Also, six years after Jobs was reappointed as CEO of Apple in September 2007, the stock had rallied 245 percent. In the six years since Dell returned to lead Dell, the stock has lost 44 percent of its value. To be fair, Dell had to navigate his company through the worst recession in decades. Even so, that’s a remarkable divergence.
So it’s no surprise that the Dell buyout is not winning encouraging reviews. The view is that this is a bigger win for private equity – paving the way for big-ticket leveraged buyouts to return in 2013 – than it is for the tech-industry icon.
And oh, the reviews of this deal are not good. Some observers gently wondered whether the buyout was a good one. Some thought Microsoft’s $2 billion loan signaled a systemic collapse of the PC sector. Some blamed the Fed. Even Hewlett-Packard revealed its noble side by kicking Dell when it was down, issuing a statement knocking Dell that accurately describes HP as well. (HP, it turns out, may be mulling its own radical steps, like breaking up the company.)
To the crowd of Dell cynics, you can add my voice. I’ve written that going private won’t save Dell, not because the company lacks valuable products or talented staff, but for basic strategic reasons: Where Dell is a leader, the market isn’t thriving; and where the tech market is thriving, Dell isn’t a leader. That is an unfortunate position for any company be in, mainly because it is so difficult to get out of.
On reflection, maybe it’s too harsh and too early to declare it’s over for Dell. And so I’m now rooting for Michael Dell. Maybe there is a scenario where Dell can emerge as a public company, pay off its debt with IPO proceeds, and reward shareholders with capital gains that come not from massive buybacks but from earnings growth. (Michael Dell may have such a plan in mind right now, but as the controlling shareholder in a private company he doesn’t have to tell anyone about it.)
What if, as a private company, Dell aggressively cut out the dead wood and enticed remaining talent with a share of future profits? What if HP did spin off its PC division and Dell could buy it at a discount, controlling 26 percent of the PC market (a market still worth $270 billion) and made PCs a loss leader – undercutting others on price to expand its share and make Dell a stronger brand in the enterprise market?
Both Dell and HP claim that their PC divisions strengthen their IT services and software offerings by creating a soup-to-nuts solution in one vendor. That really hasn’t proven true because, as long as two companies can make the same claim, there’s really no competitive edge. To fix that, one of these companies should buy the other’s PC division. If it were Dell, not only could the company compete better on price but it could also strengthen its hand with strategic, smaller acquisitions in IT consulting, cloud, security and other high-margin services. This is getting very expensive, but turnarounds don’t come cheap.
Such moves are unthinkable today because they would cause turmoil on Dell’s income statement. Investors in the public market would never tolerate them, especially after Dell’s stock has already fallen so far. But they could pay off in the longer term. And as a private company, Dell is free to undertake them now if it wishes.
The Microsoft loan is a wild card. Sure, there is an air of desperation in this investment, but Microsoft’s Windows 8 is a competitive OS on PCs, tablets and phones. Working more closely with Microsoft – the company that produced the Surface – could help Dell finally get a firm foothold in smartphones and tablets. And it could quickly scale up Microsoft’s production of the tablets it wants to see. Beyond that, the prospect of Microsoft helping out a longtime partner has to be easier for other PC makers to swallow than the sight of Microsoft manufacturing its own devices.
So there’s one scenario for a Dell comeback: Four or five years as a private company, several big, hairy and audacious moves to remake the company, and a hand-in-glove relationship with Microsoft’s software. Is it risky? Yes. Does it require a lot of big things to go right? Sure. Are there good reasons why things could go wrong? Of course.
But it just possibly could work. And whatever you think about this deal, you have to give Michael Dell credit for one thing. He is willing to take a risk that is going to remake or finally break the company he built. That may not be an unusual thing in Silicon Valley, where such crucial decisions are a way of life for startups. But for a $24 billion, 29-year-old tech giant, it’s a phenomenon very much worth rooting for.