Michael Dell and the battle to reclaim the company he founded
By the middle of next week, the dust should have settled on the fight for the ownership of Dell, and we will know if founder Michael Dell has been successful in his efforts to take his company private and fight off the unwanted attentions of the "billionaire investor" Carl Icahn.
As you might expect, Icahn claims his sole aim is to return value to shareholders that the evil Dell is keeping from them. Yeah, right.
At its peak back in 2000, Dell's stock traded at $50 before falling off steadily until three years ago when and it regained stability at around its current price. Now the situation is that Dell, the man, is offering to buy back all the shares in Dell, the company, for $13.65 a share. This price values the company at $24.4bn which will be enough to give Dell his company back.
The argument against Dell is that the bottom had dropped out of the market for commodity PCs — Dell's core business — and that all sensible hardware companies know this and are looking for new markets. That may very well be true to a greater or lesser extent, but a market in decline is not a dead market, it is just a declining one. As many know, markets can decline and still make money for long periods of time. So is Dell's market one of those?
In that core PC market, Dell is in third place after Lenovo and HP, according to Gartner's latest figures and all those companies are facing shrinking sales. Dell's fell by 3.9 percent year-on-year, but other companies' are falling much more quickly than others — Acer's fell by 35 percent and Asus' by 20 percent.
So which market would you rather be in, one that's falling so quickly it could make your nose bleed or one that falling at a modest 3.9 percent pace? Well, obviously, you'd rather be in neither, but if you had to pick one, the one falling by 3.9 percent might not be so bad.
But investors don't want to hear about how well declines are being mitigated, they want to hear about markets that are moving forward — those that could allow Dell to get his company turned around and back on the growth path.
"It is going to be very difficult for him to do that," Thomas Reuner, principal analyst with Ovum, said. "It is really difficult to change the whole direction of a company — look at HP and the difficulties that company is having as it tries to change."
Reuner believes that the big question mark is over the chief executive, Michael Dell: "Does he have the silver bullet?"
Even if Dell succeeds in his bid to take the company private, that won't necessarily take the pressure off. "Just because you have taken your company private that does not automatically make life easier," Reuner says.
Craig Slice, principal analyst with IHS, also believes that Dell has a difficult time ahead. Trying to take the company private has been a long process so far, he says, "and it will continue to be a long process", but he has convinced us that "it is still Michael Dell's company and I give him credit for that".
As Slice puts it, "Dell is a very, very large ship that is really hard to turn onto a new course", which is what Michael Dell is trying to do. "The market still thinks of Dell as a PC supplier and nothing more," he says. "I don't see the company getting out of the PC market, let's face it, it is still half the company."
Beyond the PC
If Dell succeeds in his attempt to buy back his company, what will he do with it? Dell made that fairly clear in an open letter to the company's shareholders and customer that he registered with the SEC last month.
In the document, Dell makes some points fairly clear. Point number one is the obvious one that the company is in a tough market. This is true, in that it is a very competitive market and one in which the average price of its basic products, like the PC, are continuing to head downward in price (albeit more slowly than they once did). However, it is still a very substantial market and for all its problems the company still manages to shift somewhere in the region of 10 million PCs a quarter. That is a lot of product.
Point number two is that in the face of a declining market, Michael Dell has to migrate from its old business (what he dubs "Core Dell") to a different, "New Dell". But to do that the company will be much better placed if it were privately held, the argument goes, hence Michael Dell's decision last year to go in that direction.
As part of this strategy, earlier this year Dell re-aligned itself into four segments: Enterprise Solutions Group, Dell Services, Dell Software Group, and End User Computing Group.
As the company said in a statement: "We can see this taking hold as our enterprise business experienced solid growth with revenue from Enterprise Solutions, Services and Software growing 12 percent year over year to $5.5bn." That is all well and good ,but this core enterprise group is less than 10 percent of the company.
If the company is going to grow again, then it is going to have to grow the Enterprise Solutions business quickly as it seeks to replace those sales of millions of PCs with sales of servers, software, solutions and services.
With enterprise solutions, Reuner, like other analysts, believes that Dell has real difficulty in getting any kind of traction in vertical markets, with one or two exceptions such as healthcare. But even healthcare has proven problematic with some doubting Dell's commitment and expertise.
Elsewhere in the enterprise, Dell, along with almost all its rivals, is targeting cloud, hoping to capitalise on the growth of hosted software and infrastructure. But, like so many companies, they still need a structure in place to turn cloud computing into a winning proposition. Dell "don't know yet how to make money out of it", Reuner says. Michael Dell believes his company can learn to do this and quickly.
IHS' Slice, meanwhile, sees cause for optimism in the server market, which he believes Dell has got into with some success and he thinks it could be more successful in the growing microserver market exploiting ARM chips and others.
Going private
The biggest advantage any company has in going private is that it can carry out future developments away from the public glare. As a private company, it can do anything it likes without having to be accountable to shareholders all the time.
The disadvantage is that for whatever it wants to do it will need money which it will have to get from somewhere. Dell, the company, has money in the bank and someone like Michael Dell, with his track record, is likely to always attract money. He has made money before, the argument goes, so why shouldn't he make money again? There will no doubt be many who will pour scorn on that argument, but there will also be those who agree with it.
As Michael Dell puts it, the "trends in cloud, mobility, virtualisation and software defined networking are driving a revolution in datacentre products and services" and "there is a significant shift away from traditional datacentres towards outsourcing and cloud-based delivery models". In other words, he is saying that he understands how the world is changing and he is going to change his company with it.
Do you believe him? It may not count for much but I for one do.
I met Michael Dell 11 years ago when I interviewed him for a magazine. At that time he was walking with crutches and limping quite badly. "What happened to you?", I asked politely. "Fell off my horse," he replied in broad Texan. "That must be an occupational hazard in Texas," I said, showing off that famous Scouse wit. He winced and grimaced by way of reply.
What could have then developed into a difficult interview turned out to be nothing of the sort. Dell was charming, interesting and funny. He was also deadly serious about his company and exactly where he was taking it — forwards. What he didn't know about the PC market was not worth knowing.
But that was 11 years ago. Is Michael Dell still the right man to take the company forward? Well, if I had to choose between a visionary with charm and intelligence like Michael Dell and a man who apparently understands how to make money and very little else, like Carl Icahn, the charmer wins hands down.