The announcement by Dell executives that the company is going private in a massive $24.4 billion leveraged buyout surprised few in the industry, given the weeks of public speculation, but that didn’t slow down the pushback from competitors and some annoyed shareholders.
Soon after the company announced the deal Feb. 5, officials at Hewlett-Packard released a statement saying they would target Dell customers who might be antsy about what the buyout would mean for them. At the same time, the first of the anticipated threats of shareholder lawsuits surfaced, with lawyers from a New York firm saying they are investigating whether Dell’s board of directors violated any laws by approving the plan to sell the company to a group headed by founder and CEO Michael Dell and whether shareholders were getting a fair price.
However, the response from analysts was for the most part positive, saying that taking the company private will give Dell executives the time and space—away from the spotlight of Wall Street and the pressure of hitting quarterly financial marks—to continue their efforts to remake Dell from a PC and server maker to an enterprise IT solutions provider, a journey the company began when Michael Dell returned to the CEO seat in 2007.
During that time, Dell has aggressively pursued acquisitions that give it the wide-ranging enterprise capabilities it needs, from Perot Systems in services and Force10 Networks in networking to Wyse Technology and Quest in cloud and software, EqualLogic and Compellent in storage, and SecureWorks in cloud security.
All the while, Dell has been hindered by its reliance on the PC industry—PC sales and related products still account for more than 50 percent of the company’s revenues, according to Gartner analyst Adrian O’Connell. At a time when the global PC market is seeing falling sales numbers as consumers turn to tablets and smartphones, that’s a difficult position to be in.
In an interview with eWEEK, O’Connell said it’s almost a case of two Dells: the new Dell, which is focusing on enterprise technology solutions, and the old Dell, which is still steeped in its PC heritage. “There are some real challenges in the old Dell part of the business,” he said.
Michael Dell first approached the board of directors in August 2012 with the idea of taking the world’s third-largest PC vendor private. According to a Bloomberg report, board members also at one time considered splitting Dell in two, with one company selling PCs and the other focused on enterprise IT technology. Reports about the leveraged buyout plan first started surfacing in January. Under the deal, Michael Dell will retain control of the company, with equity firm Silver Lake Partners putting in $1 billion and Microsoft another $2 billion. Shareholders will get $13.65 for each share of common stock, about a 25 percent premium.
“The deal will allow Dell to pursue its long-term strategy without having to endure the commercial market’s constant scrutiny,” Charles King, principle analyst with Pund-IT Research, wrote in a Feb. 5 research note. “That may sound picayune but in looking at Dell’s balance sheet, you find a company that has been consistently profitable (in fact, 2012 was reportedly Dell’s best year) while its largest traditional business (PCs) has been under significant, increasing pressure. In spite of that, the company’s shares have lagged those of many competitors. Going private should allow Dell to escape the ‘noise’ of the market’s obsession with short-term financials and better focus on the ‘signal’ of its long-term strategy.”
Dell Buyout Draws Analyst Praise, HP Attention, Lawsuit Threats
King said that while the deal allows for counter-proposals from outside parties, the onerous termination fees of $180 million or $450 million make it unlikely that other offerings will pop up. In addition, the 25 percent premium on the shares makes it likely that shareholders will approve the deal, he said.
What happens when Dell does go private is up for speculation. Gartner’s O’Connell said that the assumption is that the company’s transformation strategy will go on as expected, but there are no guarantees. The company may decide to shed some businesses—such as PCs—though the presence of Microsoft seems to indicate that there will continue to be some sort of client business, he said.
“The broad transformation isn’t going to change, but some of the details underneath just might,” he said.
Carter Lusher, chief IT analyst at Ovum, echoed those sentiments.
“The implication of going private is that Dell is planning radical changes to its strategy and product roadmap,” Lusher wrote in a research note. “While the company might come out of this transition stronger with a product lineup that better meets the needs of businesses and public sector organizations, there will be uncertainty as to what products and services stay, get strengthen, or get eliminated.”
Strong communications with partners and customers will be a key to the success of the transition, he wrote.
IDC analyst Matt Eastwood told eWEEK that he expects Dell will shed some low-margin businesses, such as consumer and printing, in favor of the more revenue-rich enterprise IT efforts.
“That said, I believe Dell will stay in clients but in a more targeted way, perhaps with a strategy that is increasingly segment-focused (healthcare, education, etc.),” Eastwood wrote in an email. “Otherwise, it’s more of the same, but when Dell comes out of this with a second IPO, they will look quite different than they look today.”
Even as it goes private, Dell is faced with some challenges, the analysts said. O’Connell noted that the company will still be dealing with a stalling PC business, still needs to address shortcomings in such areas as smartphones and tablets, and just as significant, a reputation as a PC maker. Officials will have to continue to court customers with the idea that the company can be trusted as the key technology partner, and will have to ensure that they have the right sales and marketing people to sell that enterprise IT portfolio.
“It takes time to change customer perceptions like that,” O’Connell said.
Dell Buyout Draws Analyst Praise, HP Attention, Lawsuit Threats
Ovum’s Lusher agreed.
“Compounding Dell’s [communications] challenge is the deep-seated brand identity as a ‘PC company,’” he wrote. “Another communications challenge will be how Dell Services (built on the Perot acquisition) shares its financials for the due diligence phase on large, multi-year IT services deals.”
Another challenge will be to see how involved the new partners—including Microsoft—will be in the day-to-day operations of the company, according to Pund-IT’s King.
“Much has been made of [Microsoft’s $2 billion] investment in the Dell merger, and how that might impact Microsoft’s relationships with other vendors,” King wrote. “Given Dell’s singular focus on x86, the company is obviously a hugely important Microsoft partner, and vice versa. We just hope that Redmond doesn’t use its investment to try exerting pressure to its own benefit. If that occurs, both companies would likely suffer consequences.”
Outside of all that, the deal could face other challenges even before it closes and the company goes private. Soon after Dell announced the deal Feb. 5, rival HP started courting Dell customers with a statement that could have been echoing some of its own troubles.
“Dell has a very tough road ahead,” HP officials said in the statement. “The company faces an extended period of uncertainty and transition that will not be good for its customers. And with a significant debt load, Dell’s ability to invest in new products and services will be extremely limited. Leveraged buyouts tend to leave existing customers and innovation at the curb. We believe Dell’s customers will now be eager to explore alternatives, and HP plans to take full advantage of that opportunity.”
At the same time, at least one law firm is looking to see if any laws were violated when the board of directors voted to approve the buyout. In addition, the New York City law firm of Levi and Korsinsky questioned whether shareholders were getting fair value for their stock, and in gave a link to shareholders interested in joining the investigation.
“Under the terms of the transaction, Dell shareholders will receive $13.65 for each share of Dell stock they own,” the lawyers said in the statement. “The transaction has a total approximate value of $24.4 billion. The investigation concerns, among other things, whether the consideration to be paid to Dell shareholders is unfair, inadequate, and substantially below the fair or inherent value of Dell stock. In particular, at least one analyst set a price target for Dell stock at $16.00 per share.”