What is Happening? After weeks of marketplace speculation, Dell Inc. has formally announced its intention to buy back its outstanding shares and privatize the company for approximately $24.4B.
The move will take Dell off the NASDAQ stock exchange after more than 25 years of trading. The buy-out of the remaining shares will be executed by a consortium made up of CEO Michael Dell, his own investment fund, and Silver Lake Partners. The leveraged deal will be financed by loans from four banks, and by a $2B loan from Microsoft Corp. Michael Dell owns about 14 percent of the firm’s shares; he and other senior executives will retain their existing shares.
Saugatuck believes that Dell (the company) wants to, and needs to, coalesce itself into a Cloud-oriented services provider, and that remaining publicly-traded inhibits the company’s ability to accomplish this core change in a short enough time period to survive.
Why is it Happening? Saugatuck’s position is that no company, large or small, undertakes such a significant step without a well-considered plan that has in turn been built from a significant need for core, strategic change. In short, Dell management, including founder Michael Dell and his investment partners, sees a need for, and an opportunity to, restructure the company.
Therefore, Dell management, and its investment partners, must see some strategic improvement available through privatization that they could not see happening as easily (or less expensively) by remaining publicly-traded. Regular scrutiny and input (read “meddling”) from venture firms is apparently less objectionable, and easier to endure, than the roller-coaster-style, short-term-focused analysis, demands, and regulatory scrutiny inherent in being a publicly-traded firm. And the company needs to coalesce – nine significant acquisitions in less than two years range from IT security, software, networking hardware, and Cloud services.
A good example of where Dell would benefit from coalescing its widespread business is the consumer-oriented device business with which Dell is synonymous. Despite years and billions of dollars of investment in enterprise-grade IT hardware, software, and services, Dell today is still identified as leading provider of – and a pioneer in – the low-margin, high-churn, short-lifecycle consumer device business from PCs to TVs to printers to monitors. In 2012, Dell’s sales of consumer devices brought in $2.5B in revenue, but that was down almost 25 percent year over year.
Meanwhile, Dell has found that its acquisition of Perot Systems, Scalent, and other large-enterprise data center-oriented providers did not yield the large enterprise-related revenue growth that the company sought. In 2012, sales to large corporations declined 8 percent to $4.2 billion. The high-end, large-enterprise IT marketplace was not the growth engine that Dell thought it bought into. And in our research among large user enterprises, we find that Dell is a respected provider, especially of core server and networking hardware - but has largely been unable to reach the established status and relationships that more traditional large-enterprise IT vendors have.
Finally, when we summarize Dell’s own financial reporting by hardware, software, and services LOBs, we see steady and relatively significant declines in revenues everywhere but Servers & Networking and Services. Storage, Software & Peripherals, and Mobility all show steady double-digit declines in revenue over the past two years. The once-core PC LOB shows smaller, but still steady, single-digit declines over the same period. Figure 1 provides a snapshot of Dell’s 2011 and 2012 3rd quarter revenue reporting.
Figure 1: Dell 3rd Quarter Revenues by LOB, 2011-12
Our net from all the above: The combination of stable and profitable Servers, Networking, and Services businesses makes Dell very well-positioned to become a Cloud-focused IT provider, not just for user firms but also for other Cloud services providers. Dell’s more modest presence and growth within large enterprises, combined with the very low margins associated with smaller firms, suggest that its core target for these Cloud-centric IT offerings will be mid-sized firms.
For an extended version of this Research Alert, visit Saugatuck Technology.
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