Dell's future: What the tech buyer needs to know
Dell is holding a shareholder vote on Thursday and the showdown is investor Carl Icahn's proposal vs. the go-private plans of Michael Dell and Silver Lake Partners. While the play-by-play and personalities are fun to watch corporate tech buyers need to pay attention because they ultimately will have to make a call on whether Dell will remain as a go-to supplier.
Of course, Dell could put off Thursday's shareholder vote to allow Michael Dell and Silver Lake to raise their bid if needed. Icahn last week sweetened his bid for Dell to $14 a share plus warrants that could boost the value of the deal. Michael Dell and Silver Lake are offering $13.65 in cash for each share.
The financial showdown is notable since Dell's business is stumbling, interest rates are rising and many of the assumptions behind buying the company now seem flawed. It's quite possible that any buyer for Dell may have a case of remorse in the months to come. Enterprise buyers don't have to worry about the soap opera, but do have to note the moving parts. After all, no one wants to risk a big purchase amid a billion-dollar pissing match you're not involved in.
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Here's a look at the scenarios and moving parts that will affect enterprise buyers:
Icahn wins. Icahn has stated that Dell can be run better and that he'd toss management with new blood. The investor upped his bid enough to sway at least one large shareholder, T. Rowe Price. If others shareholders follow Icahn, Dell would postpone its shareholder meeting for Michael Dell and Silver Lake to up their offer for the company. Michael Dell and his partners may not raise their $13.65 a share in cash bid. Why? Interest rates have spiked and PC sales have tanked. Borrowing money to revamp a company is simply harder than it was just a few months ago. Meanwhile, Dell's business, which relies on PCs, has tanked.
There has to be some part of Michael Dell who wants to walk away from his namesake company. He recognizes the years it will take to transform Dell. If Icahn's proposal really does turn out to be better---Dell's special committee to evaluate offers doesn't think so---then Michael Dell benefits. Wouldn't it make more sense to hand Icahn the keys, let him run the company and start something new. Michael Dell could start Dell 2.0 across the street. Perhaps he could name the company Lled (Dell spelled backwards) as a cloud, software and services outfit. Michael Dell could be the personification of the post-PC era, profit from Icahn and then beat the hell out of the investor later.
Should Icahn win, enterprise customers have to watch closely. Today, Dell is running business as usual in many respects, but an Icahn victory almost guarantees that your account reps and support contacts will change. Management would change at Dell and that usually means a lot of turnover. An IT buyer just doesn't need the hassle and would look at vendors such as HP and Lenovo. Buying technology is hard enough without all the uncertainty.
Michael Dell and Silver Lake win. Should Michael Dell and Silver Lake take Dell private enterprise buyers can breathe a sigh of relief---for a few months. Dell needs to be revamped and the sooner it can minimize PCs the faster it can focus on higher growth areas and ultimately go public again. Dell is also likely to cut costs and your friendly neighborhood support people and account reps could disappear. Another wrinkle: If Dell's stock goes away it's unclear how the company will retain key employees restricted stock units and other perks. In other words, Dell won't change as fast under Michael Dell and Silver Lake, but change is afoot regardless and that can impact how and who you buy your technology from.
Dell doesn't go private at all. This scenario seems to be a bit of a reach, but the PC sales declines are jarring. If Dell doesn't go private its stock will crater. Dell will have to cut costs, rationalize operations and revamp. That move will hamper turnaround plans to some degree. At the very least, Dell will lack the resources to aggressively acquire the parts it needs to focus on software and services.
Can Dell innovate? In all the aforementioned scenarios it's unclear whether Dell can truly be innovative enough to leap frog the competition. For years, Dell's primary innovation has been the supply chain and managing cash better. HP and Lenovo have caught on to that model and then some. Meanwhile, Dell's R&D spending as a percentage of revenue has historically been 2 percent or so. A company can't credibly talk about innovation until it actually spends some money on R&D. Without real innovation wins, Dell will always be seen as a commodity box player and customers will expect the pricing that goes along with it.
Leverage. When the dealing is done, it'll be worth watching the debt load for Dell. If Icahn wins, Dell will be heavily leveraged. If Silver Lake and Michael Dell win there will also be leverage. With interest rates rising, debt isn't the slam dunk it was just a few months ago. Dell's entire turnaround plan depends on whether it has the resources to invest in new parts of the business. If Dell is hampered by debt it won't be able to finance any turnaround. It'll be more of the same pain for Dell.
It'll be a buyers market for gear. No matter what happens Dell will have to battle the fear, uncertainty and doubt projected by rivals. HP is in the middle of a turnaround, but has outlined a plan and appears to be hitting targets. HP is also getting out of the balance sheet doghouse and can acquire and spend on R&D in the months ahead. HP is likely to use its turnaround tale as a hammer to hit Dell with. Customers can use that perception battle to squeeze all parties for discounts.