Dell going private, a good thing for all

The much rumored privatization of Dell could be a good thing for everyone. Here's why.
Written by Dennis Howlett, Contributor

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.

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