Dell going private, a good thing for all

Dell going private, a good thing for all

Summary: The much rumored privatization of Dell could be a good thing for everyone. Here's why.

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The last few days has seen market makers going nuts over rumors that Dell is in the process of being taken private. It's all part of the Wall Street casino game. Despite the financial games, customers and suppliers should be relieved.

Like other PC hardware manufacturers, Dell's core business has been squeezed as tablets and mobile devices have started to take center stage as the device of choice for many in business and consumers alike. As someone who uses a variety of device but who principally uses desktop machines you might be forgiven for wondering what the fuss is about. After all, if your day is spent writing 'stuff,' creating multi-media content, entering invoices, manipulating spreadsheets or other CPU intensive activities, then the desktop really is the best tool for the job. At least for the time being.

However, that cannot mask the secular trends with which Dell has been battling the last few years. If you look at the following analysis of sales from Dell's latest reported revenue numbers (reading left to right from quarter to quarter):

dell financials

It is clear that while server and networking are doing reasonably well, all other businesses are struggling. Dell has responded by attempting to exercise close cost control but there is no avoiding the fall in gross GAAP reported margins from Q3 FY12 of $3.5 billion to $2.9 billion. In short, Dell is in serious decline across its traditional markets and even those it has tried to bolster. 

Dell has also made important acquisitions in software as it attempts to transition from a hardware to a services business. But as the results reveal, the benefits these investments should bring are not (yet) coming through, adding fuel to a fire that is already burning underneath the company. 

In his analysis, Zack Whittaker says:

It's perhaps strange to think that considering we're very much past the worst of the global financial crisis -- the so-called "credit crunch" -- and while many startups and major technology firms alike -- including Facebook -- went public last year amid difficult economic times, some are pulling out of the public trading exchange and going private again.

It is not strange at all. It makes perfect sense. 

There are many possible responses to Dell's dose of the innovators dilemma. One is to stand by and watch as the market and share price crumbles. That's what has happened to RIM. HP is in a similar boat though that appears to be about appalling management meeting secular trends - a double whammy. The net result is that both RIM and HP have been mercilessly flayed in the media and markets. I have not heard the same loud voices talking in similar terms about Dell. They at least had the good sense to formally bring back founder Michael Dell. I say good sense because history is littered with companies that started to fail once the founders drifted away and passed over leadership to stewards rather than visionaries. Some will argue that Larry Dignan's prognosis that Dell's return was at best a stop gap has proven to be largely correct. My take is that it could have been a lot worse. So why should going private be good news?

As a brand, Dell is one of those companies that while commanding relative premium prices, offers the form of product guarantee that large enterprise wants. As a manager, you really don't want unreliable kit from a no-name source at any price. It kills productivity. And Dell does make some very good equipment. I have standardized on large Dell monitors as I have found them to be the best on the market for my purposes. But despite its many fans, Dell has to transform if it is to overcome the ravages of the broader market and transition to a new business model. 

My guess is Dell management has calculated that the cost of achieving that transformation and the steps it has to take in order to get there will be so painful and expensive that any attempt at achieving their goal while in the public financial gaze will almost certainly provide a substantial distraction. That's a significant part of HPs problem. Every time there is the slightest mistake, management time gets diverted to fighting the next PR fire instead of running the business. It is the kind of thing that leads to firesales and unpleasant endgames. I am sure that owning 16% of a company with a possible exit valuation at the mid $20 billion mark, Michael Dell does not fancy that prospect one bit. And he is right. 

It is far better to go through the transformation with the help of seasoned private equity but out of sight of public scrutiny. For all the bad press that PE gets, they do two things that are often missing in public companies and especially those that have strong entreprenmeurial DNA: they know how to exercise strong fiscal control and they know how to squeeze out waste that incumbent management struggles to overcome. 

That frees up the entrepreneurial managers to do what they do best: come up with business models that breathe new life into the company. That is what is happening at Infor. At Infor, PE provided the capital for roll up specialists to scoop up vendors that were struggling and then optimize their performance. From the end user perspective that usually translates into higher maintenance costs but more reliable software. Infor's investors were wiser. Once the main roll up exercise was over, they brought in Charles Phillips who is not only a roll up specialist from his time at Oracle but also a visionary about what can be done once you've optimized the business. That is a rare combination. We are starting to see the fruits of that transformation and I am confident that over time we will see Infor perceived as a much more important player than it appears to be right now. The groundwork is in place for an eventual IPO as well, which is the obvious next step and which Dell may eye years down the track. 

How might going private work for Dell? It is far too early to speculate in any depth but my guess is that an early exit from the consumer PC market has to be something to watch for. The same should go for any low end peripherals. If you are Larry Dignan then that's a no brainer. However, I am equally intrerested to see how Dell might leverage its position as a quality provider for applications that will require significant processing power long into the future. Here I am thinking both accounting and multi-media production, the latter becoming an important enterprise market as more businesses recognize the value of multi-media content creation they can control. Can it also consolidate on the slow but steady server market play? What about re-engineering for cloud storage and becoming the 'pizza box' provider in that segment?

But what of services? Here Dell has an assortment of assets it will need to both augment and optimize while facing stiff competition. This to me is where the most significant challenge lays. There are so many services available to business that Dell will need more than its brand if it is to successfully scale up and out. This could go in any number of directions so I won't speculate as I will almost certainly be wrong. 

If you believe the clock is ticking for Dell to go private and are in buy mode then I would not necessarily hold back. Sure, it can be a good price bargaining chip but it is important to remember what you're buying goes beyond the physical box. What's more, if history echoes loudly in these circumstances then we can expect that a rejuvenated Dell, while different in shape will remain a solid provider that should be part of anyone's short list. 

As always, sitting in the peanut gallery is easy. But what do you think? Let me know in Talkback.

Topics: Dell, Enterprise Software

Dennis Howlett

About Dennis Howlett

Dennis Howlett is a 40 year veteran in enterprise IT, working with companies large and small across many industries. He endeavors to inform buyers in a no-nonsense manner and spares no vendor that comes under his microscope.

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Talkback

34 comments
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  • A lot of this is the result of

    government regulation a number of years back requiring public companies to give quarterly instead of annual reports. This made it much more difficult for these companies to make long-term plans. Typical government mucking around with stuff it had no clue about and making things worse.
    baggins_z
    • You may actually have a point

      But corporations have been fixated on short term profit at the behest of their shareholders since the hostile takeover epidemic of the 1980s. It would be helpful if the standards of fiduciary duty didn't require "profits ueber alles", but I would expect a chorus of Conservatives to denounce *any* effort to change that standard as anti-capitalist.
      John L. Ries
  • You lost me

    When you said "Dell makes high quality equipment".

    They do not - low quality junk is all Dell has ever made. Market share is down and has been going down for them for a long time.

    Going Private is a last ditch effort while circling the drain....
    itguy10
    • You must not be a business customer of Dell

      In my experience Dell's commercial products and support are very good.
      williamsholland
      • As has mine

        My experience with Dell servers has been quite good.
        John L. Ries
        • Same here

          Last dell laptop, 2yrs, no problems other than a new battery required.
          Latest dell laptop, 6mths, no problems, no BSOD.

          Service and support is excellent when needed. We keep buying because the kit is good and the support is good.
          Little Old Man
      • "Dell makes high quality equipment"

        My experience with Dell products has been great for the past 12 years or so. My first desktop was Dell Dimension L800r, the one with Window ME installed. I had BSOD during the first reboot. Dell's courteos technical stuff on phone had it revived within half an hour. It turned out the problem was the OS. This desktop is still kicking around with Linux Ubuntu installed. I then bought an Inspiron 1520 laptop followed by a Inspiron 530 desktop. Everyone of them are quality products. You, itguy10 must be a lucky dude. "They do not - low quality junk is all Dell has ever made." You definitely are entitled to your own opinion. I wish I could agree with what you were ranting about.
        dingolar
      • Quality

        I have used Dell laptops for the last 10 years and I've never had a failure. I have a Dell poweredge 1900 server in my home office and it's been up for 2 years an 8 months continously and I have not even been back to my home base. Can't say the same for the HP Server I've also got. Good thing I brought an VM backup with me so I could remote host that system or I would have to return home from Indonesia just to reboot the thing.
        chrisaaaaaa20
    • I've been using Dell a very long time

      The only problems I've ever experienced were industry wide issues with the faulty capacitors from China. Servers run 24x7 and live through extreme conditions (temperature, dust, etc.) found in remote server closets without environmental controls. We easily have seen Dell Servers serve 8+ years with zero downtime only to be replaced due to new software demands. Optiplex desktops and Precision workstations run extremely reliably overall (based on deployments from 450 to 600 in my experience) with failures only becoming common after 7 years of operation in the field running 24x7. Also Dell Ultrasharp Monitors set the bar on display performance.

      This is a perspective of the business class machines with good top-tier support. I don't have too much experience with the consumer side although two of my kids have Inspiron Laptops (mine's a business Latitude) and they don't seem to have any issues. My oldest kid still salivates over Dell Alienware Laptops but high price is he barrier.
      whowhatwhenwhere
    • Dell fan here too

      In my experience, their stuff is at least as good as (if not better than) their competitions products. The few times I did need warranty support, they where very fast (and painless) about getting it fixed.
      nelsonhoover
    • Wow the grease from the fry station must be seeping in...

      We have been using Dell for years her servers and laptops - and even desktops. And they have been solid machines and equipment. This is everyday business use, by people do do not care if it gets banged around. So I say 2500+ users of equipment and very little issues kind of nullifies that stupid comment. Back to work, smoke break is over and the lunch rush is starting.
      ScanBack
    • Eye of the beholder

      I worked a few years at the Tandy R&D center in Fort Worth and Tandy computers were at that time being tarred with the "Trash-80" moniker. Ironically enough, one of the computers I worked on got bad reviews under the Tandy label, but excellent reviews when it was sold by Digital Equipment Corporation. Same factory; different label. Same computer; different reputation.

      Point? Junk is often in the eye of the beholder.

      FWIW: Tandy later built only enough computers to supply its own stores. and manufacturing could not make a profit doing that. Our computer business, lock,stock and engineers, was sold to AST Research, where I spent some five years. But even AST was running about a million dollars a day in the red the end. Why? Dell was eating our lunch selling direct.

      I bailed in 1997 and AST was taken over by Samsung shortly thereafter. It's gone now -- and Asian manufacturers are eating our lunch.

      Interesting times.
      ka5s
    • So you've used one or one line of products

      And from that you assume all they make is junk? Yeah right. Just like HP, Acer and all the rest, they have some junky consumer stuff, but their enterprise stuff is top-grade. I know of many many stories of people dropping a Latitude D series laptop and even with broken cases, display hinges and all they keep on chugging along. Series E have very good battery life. And their enterprise gear is, well, enterprise grade. Enterprises all over the world run their businesses on Dell stuff, their service being one of the key selling points for them.
      fer.paredesb
    • If all you know is the consumer gear maybe you might think that

      Stop buying Inspiron, Dimension and start buying Latitude and OptiPlex. Worked for us.
      dowlingm
    • Are you living under a rock?

      Dell makes a decent kit - I've owned the same Dell XPS desktop for the last 6 years and it's still running the latest and greatest with no issues at all. I had an HP laptop that died about 6 months ago and I'm using a Dell laptop that is about a year older than my dead HP. My former employer used Dell computers for it's building automation control and the only thing that had to be replaced was the hard drive - which fortunately was on a regular image backup so nothing was lost. My current employer uses Dells for their building automation needs and one desktop is as old as my XPS and is still going strong. All of our work laptops are Dell and other than issues with Vista - corrected by upgrading to 7 - they have had NO issues at all. By contrast I have a friend that works for the IT department for my former employer and they use HP - the number of dead laptops and desktops is amazing.
      athynz
  • Dell is also not an innovator

    Most PC's were sold mail order before Dell came along....

    All Mikey Boi did was apply JIT to computers (JIT has been used by Toyota forever). Any high school graduate could see that when the prices of your components usually decrease it is best to order them as needeed rather than warehouse.

    What else has Dell innovated? Hint - Nothing - unless you consider putting low qualuty junk in a box and selling it innovative.
    itguy10
    • Re: Dell is also not an innovator

      Their R&D budget as a proportion of revenue is higher than Apple's.
      ldo17
      • Fire them all

        If that is true, then they should fire all the R&D people. The results over Dell's history does not show any innovative products, at least in their mainline businesses.

        I'm guessing that the R&D budgets are what they inherited from the organizations that they purchased in storage and software businesses.
        JScottA44
    • putting low qualuty junk..

      I see, you must be putting Dell generic low "qualuty" junk key board in good use.
      dingolar
    • You continue to prove all of the posters here correct -

      that the it stands for first and last letters of IdioT i.e. IdioTguy10
      ScanBack