Dell's directors forecast a grim future for the PC industry
A lengthy proxy statement submitted to the SEC by Dell's board of directors makes a forceful case for taking the company private. A Special Committee sees a gloomy future for the PC industry and even worse prospects if Dell tries to compete with more agile rivals.
My eye was drawn to a lengthy bulleted list that begins on page 47, laying out the reasons why anyone holding Dell stock might want to sell. The section, under the heading “Reasons for the Merger,” was prepared by a Special Committee made up of “four independent and disinterested directors of the Company.” (The Wall Street Journal [subscribers only] has a list of the four directors, with bios.)
The Special Committee argues that the proposed all-cash buyout represents a premium of between 25% and 37% of the Dell share price before the offer became public. If you’re a shareholder, they say, you should jump at the buyout to avoid being exposed to the “various risks and uncertainties related to continued ownership of Common Stock.” What follows is a remarkably downbeat portrait of Dell’s bleak position in a PC industry whose future is uncertain at best.
Year over year, PC shipments have begun to show steep declines after slowing for the past five years, as data from Gartner Research confirms:
The picture in 2009-2010 was slightly distorted by the worldwide recession, with shipments down sharply in 2009 as the economy struggled to come back from the 2008 banking crisis, with a bounceback in 2010 that consisted in no small part of deferred sales. If you assume that half of the shipments in 2010 were deferred from 2009, then the percentage increase in shipments over the past six years is 13, 11, 9, 7, 4, -3.
Even without adjusting for those unusual factors, the trend line is unmistakably down, and with the current economic malaise in Europe there’s every indication that the negative trend will continue.
That’s the starting point for the Dell Special Committee’s list of negatives, which opens by citing “decreasing revenues in the market for desktop and notebook PCs and the significant uncertainties as to whether, or when, this decrease will end…” The Special Committee blames the slowdown on a variety of factors:
continued macroeconomic pressures
lengthening replacement cycles
the uncertain adoption of the Windows 8 operating system
unexpected slowdowns in enterprise Windows 7 upgrades, and
increasing substitution of smartphones and tablets for PCs.
The industry as a whole is also under pressure thanks to “the increasing usage of alternative PC operating systems to Microsoft Windows.” Presumably that’s a reference to both Apple’s OS X, which is applying pressure at the high end of the market, and Google’s Chrome OS, which has scored some recent gains with extremely low-priced models from Samsung and Acer.
The Special Committee also notes “the increasing importance of the smartphone and tablet markets.” That trend is especially unfortunate for Dell, which “currently has vey little presence” in that market.
Dell’s historic strength in high-volume sales to large corporations is also at risk, the Special Committee says, citing “increasing adoption of ‘bring your own device’ policies by businesses, which allow employees to make their own decisions regarding which computers and/or other electronic devices.” That’s followed by a dry bit of understatement about unnamed competitors “whose products presently have greater appeal to consumers than the Company’s current products.” Ouch.
Even if the PC industry can keep the volume of PC shipments up, revenues are still a big problem across the board, thanks to “ongoing downward pricing pressure and trend towards commoditization in the desktop and notebook personal computer market.”
Several of Dell’s competitors, most notably Lenovo and ASUS, have scored gains in this down market. The secret of their success? At least in part, they’ve grown by concentrating on the low end of the market. That’s a problem for Dell, the report says. Dell’s strength has been in “higher-margin premium PC products,” the Special Committee says. The current PC market, especially in developing economies, has seen a “shift in demand … to lower-margin value products, a segment in which the Company has historically been much less competitive.”
Michael Dell, who would presumably remain as CEO of the post-buyout company that bears his name, clearly wants to get out of the increasingly cutthroat PC business, where margins are slim and getting slimmer.
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