Dell’s Tough Q1 Could Help CEO’s Buyout Efforts

By Jeffrey Burt  |  Posted 2013-05-17

Dell’s Tough Q1 Could Help CEO’s Buyout Efforts

Dell’s difficult first-quarter financial numbers once again put a harsh spotlight on the difficulties of being a PC maker in a world where consumers and businesses are increasingly turning to smartphones and tablets.

Those numbers—including a 2 percent dip in overall revenues and a 51 percent drop in profitability—also could lend a little more credence to CEO Michael Dell’s efforts to buy his namesake company for $24.4 billion and take it private, a move he has argued will enable him and other executives to speed up their transformation of Dell into an enterprise IT solutions and services vendor and reduce its reliance on declining PC revenues.

Michael Dell and equity firm Silver Lake Partners in February announced a bid that will pay investors $13.65 a share, a number that has been criticized by some investors as too greatly undervaluing the company. The offer has been met by some shareholders with promises to vote against it and possibly put up a proxy battle.

It also has driven shareholders Carl Icahn and Southeastern Asset Management—which together own about 13 percent of all outstanding Dell stock—to offer their own proposal to buy the company and to roll out a slate of candidates for the board of directors. They have called the bid by Michael Dell and Silver Lake a “giveaway” and criticized the current directors for approving it.

But with the continuing deterioration of Dell’s financial picture, the $13.65-per-share offer could begin to look better to some investors, particularly since the bid would enable them to get a return on their shares and get out from under the company. The Icahn/Southeastern deal offers stockholders the option of either selling their shares for $12 each, or keeping them and buying more shares at $1.65 each.

The price on Dell shares closed at $13.40 May 17.

Dell executives originally had scheduled to release the first-quarter earnings May 21, but moved it up to May 16 after the numbers were looking particularly poor. The company’s PC client business took a beating, with operating income falling 65 percent on sales that tumbled 9 percent. So far, Microsoft’s Windows 8 operating system is not providing the hoped-for boost to the global PC market.

In a conference call with analysts and journalists May 16 to discuss the earnings, CFO Brian Gladden said the company expects “relatively weak demand in this business and continued market competitiveness,” and noted that the problems reinforce the company’s commitment to cost-cutting measures to reach $1 billion in savings in the PC business by the end of 2015.

During the call, Gladden and Corporate Controller Tom Sweet were asked about the company’s new aggressive pricing for PCs, and while the two said there had been changes in pricing, there hadn’t been a wholesale shift in the company’s strategy around PCs, which executives—including Michael Dell—have said will continue to be an important part of the company’s efforts going forward.

“I wouldn’t say our strategy has changed really at all,” Gladden said in response to a question. “I think tactically we’ve recognized the need to be competitive. We’ve adjusted our pricing appropriately. We are expanding our offerings across the portfolio of … offerings at high price bands or higher value products, mid-value products, lower value products to play in key markets around the world as we’ve done over time. And I think you’ll continue to see us do that. This is not a new strategy. This is not a new business model for us. I would say it's adjusting tactics given what the markets [are] doing and really where we need to be in the portfolio.”

Dell’s Tough Q1 Could Help CEO’s Buyout Efforts

Still, the PC business is hurting, and the trend worldwide is downward. According to IDC analysts, PC shipments globally fell 14 percent in the first quarter.

Dell is trying to reduce its dependency on PC sales. Since Michael Dell returned to the CEO seat in 2007, the company has spent billions of dollars buying companies in hopes of boosting its capabilities in a wide range of enterprise IT areas, from networking and storage to security, software and services. Dell’s enterprise solutions business saw revenues grow 10 percent over the same period last year, to $3.1 billion, while operating income jumped 71 percent, to $136 million.

A problem is that the issues around the PC business are making this transformation difficult, according to Krista Macomber, an analyst with Technology Business Research.

“The bottom line indicates that Dell has had to cut prices and rapidly increase investment in acquisitions, sales efforts and new technologies just to maintain the top line, notably due to declining demand in the PC industry,” Macomber wrote in a May 16 research note. “This suggests that the company will not be able to achieve sustainable corporate revenue or profit momentum as it remains in its period of reinvention to an end-to-end solutions provider during the remainder of 2013.”

That could play into shareholders’ decisions on the future of the company, particularly now that they could be offered two significantly different proposals to choose from. Both Michael Dell and Carl Icahn say they are optimistic about Dell’s ability to recover, and both are confident in the strategy of focusing on enterprise IT solutions as the key to any turnaround.

However, while there are differences around the amount of money involved, whether to take the company completely private and how much debt to take on, there also is another place where the proposals deviate: if Michael Dell’s bid is accepted, he remains CEO. Icahn already has said that if his group take control of the company, Michael Dell will be out.

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