The love of Mike: What you need to know about Dell's buy-out

The love of Mike: What you need to know about Dell's buy-out

Summary: Dell founder Michael Dell is taking his company private by giving the money back to shareholders. Why is he doing that, where is the company going, and can Mike make it?

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Michael Dell is doing what he once suggested to Apple when it was doing far worse than Dell is today: he's giving the money back to the shareholders. However, this is not because he's closing the company down. Instead, he's taking Dell private in a $24.4 billion deal financed by himself, Silver Lake Partners and a group of banks. Microsoft is chipping in with a $2 billion 10-year loan at a rate of interest believed to be between 7 and 8 percent.

Michael Dell
Michael Dell. Photo credit: Dell

Going private will mean Dell and his management teams won't have to worry about Wall Street's quarterly scrutiny, with its concern for short-term numbers and lack of interest in long-term strategies. In theory, Dell will be able to restructure and re-orientate the business in private, without it turning into the sort of media-driven horror-show exemplified by companies such as Hewlett-Packard and Yahoo.

Going private probably means one thing, and definitely means another. It probably means that Mike and his backers feel that Dell's shares are undervalued. It definitely means that Dell will be back on the stock market when it can sell shares for significantly more than the $13.65 (plus costs) that it is paying for them now.

This might happen in two or three years, but I suspect five years is more likely. It could be 10 years. But it has to happen because Silver Lake and the banks will want their money back, plus profits.

One of the problems with Dell shares -- and this also applies to Microsoft shares -- is that they were massively overvalued in the first tech bubble at the end of the 1990s. Dell shares increased in value by 16,000 percent, as shown in the graph below. You think Apple shares boomed when they increased in value by 4,000 percent? The graph below shows the difference.

Dell share graph
The 1990s PC boom and the value of Dell's shares. Credit: Screengrab from Yahoo Finance by ZDNet

The problem is that Dell's 2000 stock price was based on a fantastic boom in PC sales in the 1990s, and the anticipation that Dell would rake in profits for the next decade. No sane person is looking forward to a similar boom in PC sales over the next 10 years. Dell's PC profits will be dramatically lower, and this results in the lower share price.

So why is Mike making such a big bet on the future?

The answer is that Dell is moving into enterprise software and services, which generate better profits than PCs. To speed up this transition, Dell has been buying other companies. These include EqualLogic in 2008, Perot Systems in 2009, KACE Networks and Boomi in 2010, and Compellent in 2011. Last year, Dell picked up AppAssure Software, SonicWall, Clerity Solutions, Quest Software, Gale Technologies and Credant Technologies.

In sum, Dell is building a company to compete against IBM, HP and Oracle in the enterprise market. Mike will presumably try to avoid competing against the Asian tigers -- Samsung, Lenovo, Acer and Asus -- in the PC market. However, this does not mean Dell will stop making PCs. PCs still sell roughly a million units a day, and businesses depend on them. Dell will aim to sell fleets of thousands of PCs and servers that it can pre-configure, install, and maintain as a service. This provides less money up front, but more profit in the long run.

Dell's breakdown of revenues
Dell's breakdown of revenues for FY2012. Source: Dell 10-K filing

Dell's last 10-K regulatory filing gives us a good idea of the state of the business a year ago. In fiscal 2012, Dell sold $8.3bn worth of servers and network products, $1.9bn of storage, $8.3bn of services, and $10.2bn of software and peripherals. That's around $28bn. It also sold $14.1bn worth of desktop PCs, and $19.1bn worth of "mobility" products (notebooks, mobile workstations, smartphones, and tablets). The total came to $62.1bn.

For comparison, Dell's turnover is roughly the size of HP's Enterprise business unit, which brings in about $57bn. Dell can grow if it can profit from HP's woes, and vice versa, of course.

It remains to be seen whether the company founder can do it. He certainly knows the PC business, and there was a time when he was a hero. In my Computer Weekly column in March 1999, quoting someone I couldn't name, I wrote: "How can I do what Dell does? I wanna be like Mike! That's what most computer company bosses say every morning, if only to themselves." That was before the crash. Nobody wants to be like Mike today.

The fact is that Mike's not doing so well. In 2004, he stepped back from the business, and Kevin Rollins was CEO until the start of 2007, when Mike took back the reins. Maybe he didn't think Dell was doing well enough, but look at the graph of Dell's annual turnover, below.

Graqph showing Dell's annual turnover from 1990, compared with IBM and Apple.
Dell's annual turnover from 1990, compared with IBM and Apple.

Dell started from nothing and zoomed past Apple, particularly after the mega-launch of Windows 95. There was a glitch after the millennium financial debacle, but on the whole, Dell did pretty well to grow its annual turnover from $0.5bn in 1990 to $31.89bn in 2000 and then to $57.42bn in 2007. After that, growth disappeared, and Dell increased turnover by just $5bn in five years.

It's true that Mike has had to battle against a flat-lining PC market and a huge global recession, but it's also possible to imagine that Rollins would have done a better job.

Dell's growth obviously doesn't compare with Apple's, but then, nobody's does. In any case, Apple didn't get big by selling computers, and its actions show no real interest in corporate and professional computing.

Should we blame Mike because Dell hasn't made any visible progress in selling smartphones and tablets? Possibly, but HP didn't do any better by buying Palm and having an embarrassing flop in the tablet market. IBM and Oracle didn't even try.

Can Mike transform Dell into an enterprise powerhouse in the next five years?

Maybe, but I don't think the shareholders would bet on it. And now that Dell has raised enough cash to take the company off the market, they won't have to.

Topics: Dell, Enterprise Software, Hardware

Jack Schofield

About Jack Schofield

Jack Schofield spent the 1970s editing photography magazines before becoming editor of an early UK computer magazine, Practical Computing. In 1983, he started writing a weekly computer column for the Guardian, and joined the staff to launch the newspaper's weekly computer supplement in 1985. This section launched the Guardian’s first website and, in 2001, its first real blog. When the printed section was dropped after 25 years and a couple of reincarnations, he felt it was a time for a change....

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9 comments
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  • Dell will be Gone in 10 years

    They are loosing marketshare left and right. Unlike IBM who had a great robust name and brand behind them, Dell's transformation to services will not work. Who are you going to trust- IBM (who has been around over 100 years and done things well) or Dell who has a history of making and selling subpar things?

    Dell, don't let the door hit you where the Good Lord Split you. You deserve this.
    itguy10
  • Just keep copying and pasting

    the same response over and over, it makes you look so intelligent.
    hoppmang
    • Does the truth hurt?

      The truth about Dell stings....
      itguy10
      • What truth about Dell?

        Does Dell's business personally stings you?
        Ram U
  • somewhat off topic

    Our tax and regulatory structure, largely created by and for wall street, richly rewards speculation and short term profit taking. Mike dell was in a position to take the company private and focus on a long term strategy. I wish him success.
    krossbow
    • I wish Mr. Dell success, too.

      Sure sign of good management is a staff of dedicated employees. They have to be inspired by 'someone'. I hope he gets his wish.
      brainout
  • And Microsoft?

    And what does Microsoft get for its $2 billion loan?

    "No, Mike, you're not making any Chromebooks!" perhaps?
    BrownieBoy
    • Well we have to look at lending terms and agreements

      and check whether it is conditioned loan or not. And this is a loan, and nowhere close Microsoft's investment in Apple or Nokia-Microsoft agreement.
      Ram U
    • I don't think that Mike...

      ... needs Microsoft to tell him not to make any Chromebooks. That's a race to the bottom proposition for most hardware makers.
      Enterprise hardware and services is where the real margins are.
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