Dell goes private: 10 big unknowns

Dell goes private: 10 big unknowns

Summary: Dell will avoid public scrutiny as it revamps for the future, but the company still faces many hurdles and unknowns going forward. Here's the roadmap.

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Dell has gone private courtesy of a leveraged buyout via CEO Michael Dell and Silver Lake Partners and now the company is free to reinvent itself without Wall Street moaning. But let's get real here: Dell as a private company isn't a slam dunk.

michaeldell
Michael Dell: Will a buyout give him more room to revamp his company?

Under the terms of the deal, Dell shareholders get $13.65 a share in cash for each share. The total transaction is $24.4 billion. Michael Dell owns 14 percent of Dell shares and will stick as CEO.

CEO Dell said:

I believe this transaction will open an exciting new chapter for Dell, our customers and team members. We can deliver immediate value to stockholders, while we continue the execution of our long-term strategy and focus on delivering best-in-class solutions to our customers as a private enterprise. Dell has made solid progress executing this strategy over the past four years, but we recognize that it will still take more time, investment and patience, and I believe our efforts will be better supported by partnering with Silver Lake in our shared vision.

The good news for Dell is that it won't be on the quarterly treadmill. The bad news for Dell is that private equity and leveraged buyouts can be a new ballgame.

Dell goes private for $24 billion | Will Microsoft's $2 billion role in Dell's buyout play out like its Nokia partnership?

What an IT buyer may see as Dell goes private

  • FUD from rivals such as HP on servers and PCs.
  • Account management changes. 
  • Shifts in messaging. 
  • A more aggressive shift to pitching software and services. 
  • Strategic changes to the PC sales approach. 

Here are the big unknowns about Dell's new chapter:

  1. Can Michael Dell work with Silver Lake? As a public company Dell had to wince and deal with analysts, shareholders and investors. When times are good, Dell was a superstar. Unfortunately, Dell's quarters haven't been great for years. As a private company, Dell will work with Silver Lake, which can show up and want results whenever it wants. Will the new boss be better than the old boss?
  2. Dell will have more debt. Note how Microsoft's investment is deemed a loan. Private equity deals are all about financing and Dell will be more leveraged. Dell will lose some of its flexibility when it has to pay debt and private equity dividends. Just like your household budget, debt can ultimately limit your options.
  3. Will Dell keep acquiring? For Dell to transform it will have to make acquisitions. Without equity, Dell will have to pay cash. That cash will either come from more debt or operating results. Dell's shares weren't much of a currency anyway, but now they aren't an option at all. Another issue: Will upstarts want to be acquired without any equity upside?
  4. How much patience will Dell require? Dell's transformation from a PC maker to cloud and enterprise software and services company akin to IBM will take time. It's unclear whether Silver Lake will be much more patient than Wall Street. A five-year time horizon is one thing. A decade turnaround is another ballgame entirely.
  5. Can Dell hone its messaging? Dell's messaging and marketing as a public company has been muddled. When companies go private they can fall off the radar. Dell will have to avoid that trap and improve its message to IT buyers.
  6. Will IT buyers lose their Dell contacts if sales and support are turned over? Going private often results in turnover and restructuring. That turnover can be disruptive for IT buyers who are used to dealing with the same account managers for years. 
  7. How will Dell's partnership with Microsoft work? Microsoft floated Dell a $2 billion loan to help finance the buyout, but doesn't own a stake. What will Microsoft need in return? The short answer is probably manufacturing capacity for Microsoft's hardware. The wild card is whether Microsoft's hardware partners will be wary of the Dell deal. Microsoft has structured its loan in a way where it can balance all sides.
  8. How will competitors pounce? Dell's buyout is likely to result in a round of fear, uncertainty and doubt from rivals such as IBM and HP. It'll be interesting to watch whether Dell can take the assault.
  9. Will Dell stay in the consumer PC business? Now Dell is private, it is free to abandon consumer PCs. The big question is whether Dell will follow through. The unit generates revenue, but operating income is just above breakeven.
  10. Can Dell figure out mobility as a private company? Dell has to solve for mobility, tablets and maybe even smartphones. That expertise may be lacking whether Dell is private or public.

Topics: Data Centers, Cloud, Dell, Enterprise Software, Hardware, Servers

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25 comments
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  • Dell Circling the Drain....

    Make Junk and people will realize it. Dell has made Junk since they started....

    However, how many private companies with shrinking marketshare in their core business, no real "brand equity" and increased debt stick around long term? Hint: not many.

    Dell is circling the drain and I predict will be gone in less than 10 years.
    itguy10
    • You said that same thing here already

      Is that a catch phrase you're proud of, because you pasted that from another blog here today.
      The fact that investors have invested shows me that the smart people with the money have a different outcome in mind then what you predicted. I think I'll pass, and not invest based on your views, thank you.
      NoMore MicrosoftEver
      • You can't invest in Dell.

        And look at what an investment in Dell in, say 2000 would be worth today? Peanuts.

        Dell is a dying company and has been for a long time. They are not relavent in today's environment and every passing day will make them less relevent.
        itguy10
        • You mean relevant like HP?

          http://www.zdnet.com/hp-reportedly-considering-company-break-up-7000010874/

          I think Dell is much more relevant then HP is anymore. The fact that Dell is number three out of all PC manufacturers is also telling of their relevance.
          NoMore MicrosoftEver
  • A Loan from MS !

    When you sup with the Devil, use a long spoon.

    I hope Michael Dell is well versed with Faust.
    Alan Smithie
    • You said this 3 times already on this.

      If you have anything more to share, please care to provide. Otherwise I will just ignore reading yours on this topic anyway.
      Ram U
      • Nay nay

        And thrice nay
        Alan Smithie
  • Dell is almost dead

    I honestly will not buy a dell system anymore, we have had A LOT of problems with their hardware as of late that we haven't had with others.

    They just make a bad product these days.
    cmwade1977
    • I do not share your narrow view

      It is strange, but I have the opposite experience. I assume that you have most likely only dealt with the low end of their products, which are aimed at consumers. I find their business level of products are very reliable and long lasting indeed. I am aware that the low end is not that good, but then what entry level product from any company is?
      Kieron Seymour-Howell
      • I think this is exactly the problem

        if they can not make a working consumer product, they should quit making them.
        If I buy an entry level Mercedes, it will be a smaller car, but it will still have the quality, the ride, and the service level of the more expensive Mercedes cars.
        Unfortunately, Dell does not bother with the brand building lately.
        ForeverSPb
    • Their Hardware Seems Fine To Me

      I've owned 3 dell machines. Of the three, one lived 10 years, one 7 (although a hard drive did need replacing a bit earlier), and the last is currently a year old and still running strong (not a single hardware problem). If a computer lasts me more than 5 years, I am happy. All of these machines were used extremely heavily (>5 hours a day, every day, almost without exception over their entire life) and the laptops (the newer two) are/were not well cared for. I was usually carrying the laptop open around with me, accidentally banging it on walls and tossing it onto the bed. Also, none of these were business machines (although the latest is an Alienware), and the first two weren't even high end.
      Patrick Aupperle
      • Dell's Consumer PC's Longevity

        I purchased a DELL laptop in 2005. It lasted about 3 days. I requested support, which phone support could not make the system work. They sent a tech to my house, as I purchased onsite support. The tech sait that the system needed to be replaced. I received a new computer within the next four days. I was able to get it set up with a bit of restoring to factory settings once (seems that's always the way with new systems). The new system worked beautifully until my house was hit by lightning in 2011. I dropped a new hard drive in in 2010 simply because I needed more space. It worked beautifully. It is still "working" - albeit not well because of the damage to the mother board, video card, sound card, keyboard, and pretty much every part except the wireless router.

        I then purchaed a new high end XPS 17 with 3D technology. The machine that I ordered had been on the market for only three months. I had setup problems. When I requested support, I had to talk to India - the only support that DELL has. I purchased onsite support. DELL refused to send anyone to my home. With much adeau, we finally set the machine up. The only problem was that when I entered any information in any program from a simple email to Microsoft Office (including Excel), the information would just disappear into "word heaven" or "keystroke heaven". DELL refused to send a tech even though I paid for the onsite support, phone support, and accident warranty - all with replacement even to a different machine if the product was no longer on the market. Instead of honoring the replacement, I was told that the company could only offer a refund. They said they'd send a box for me to send it back. I was told that they no longer made the model I had purchased. Instead of offering a different system for the replacement of the $3600 model that I had purchased, DELL support management told me that the military discount would not apply to the ONLY replacement with the same customization that I had on the XPS, which was the Alienware laptop for $1000 higher and no discount for military or education. They did not honor their warranty. They only refunded my money less return shipping. They wanted to charge me a 10% restocking fee until I threatened them with the Board of Consumer Affairs.

        This article clarifies why the system didn't work. I have been debating over a DELL Alienware 3D MX-17 or a Toshiba 3D 17" laptop. From what I am reading here, I am now more inclined to go with the Toshiba, even though they do not offer the onsite support option, which was why I purchased the DELL in the first place. Yet now, from personal experience, I know that DELL does not honor that warranty any longer.
        anjl54
  • You said that same thing here already

    You said that same thing here already, already, and already, like a broken record. 10 years? It must be your favourite number, eh?
    dingolar
  • Larry, your 4th point is right on head.

    How much patience Dell has to rebuild Dell?
    Ram U
  • it is the website, improve it

    Dell should improve their website. I have been buying Dell PCs for a business the last 12 years. I remember when you could customise a PC with a lot of detail, and also when you could see the PC from all angles and the complete specification of the base product. Yesterday I was looking to buy another PC and the models I looked they did not tell how many USB 2.0 and how many USB 3.0 ports. I had to look for images in Google to see which USB ports are marked as 3.0. Also the graphical cards, there is no information about the diferences between them. Again I had to look in Google. Then the keyboard and mouse, no picture, no options... A pity, otherwise I like Dell high quality, at least my experience is very satisfied with their computers.
    aviamquepasa
    • I've seen the same thing

      Their website getting more and more irksome to use, whether to shop for a new computer, get updated drivers, or to see what sorts of memory upgrades work.
      JustCallMeBC
  • B-2-B Account Managers / SalesPeople are THE Key

    Larry, you said- "That turnover can be disruptive for IT buyers who are used to dealing with the same account managers for years. --- How will competitors pounce? Dell's buyout is likely to result in a round of fear, uncertainty and doubt from rivals such as IBM and HP. It'll be interesting to watch whether Dell can take the assault."

    The only way DELL can stay alive is by NOT killing off their best B-2-B SalesPeople. I know that from real-life experience. The assault will take the form of RIVALS HIRING Dell's recently fired B-2-B Account Managers/ SalesPeople. Perhaps Dell or their rivals should give me a call.

    --- https://plus.google.com/114660584480111918841/about
    Paul B. Wordman
  • They have some work to do

    I am fed up with dealing with Indian call centers. If Dell can now stop trying to appease the investors and get back to making PCs, then there may be hope. Customer service: don't sell it short with third rate staff. I stopped buying Dell based in the shoddy Indian call center they use alone.
    happyharry_z
    • Appeasing Private Equity is usually a lot harder than the "stock market."

      When you own 14% of the stock in a public company like Dell, you've got a lot of leverage, especially if it's preferred stock or you've rigged voting rights (cf Zuckerberg at Facebook). Owning 14% of a private company, especially with PE sharks as partners, has a lot less juice. If Dell doesn't generate the returns they expect, those Silver Lake guys are going to be unhappy. And as the money guys, if they decide to "take their ball and go home" Dell is done.

      It will be interesting to see how much "skin" MD has in this game. I wonder if he simply took a big payday and is just sticking around as a figurehead CEO.
      matthew_maurice
      • Majority Stake

        Micheal Dell has the majority stake in the company. Meaning he can override Silverlake or even all other stake holders combined if necessary.

        As far as skin in the game, he used not just his own shares but contributed another billion or so on top of that. So he has several billion of skin in the game specifically to make sure he maintains control of the company. He will still be a multi-billionaire if Dell fails entirely, but that is not the actions of a figurehead CEO. This is probably much more about legacy than about money.
        SlithyTove