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

The company’s share price dropped to $13.40, below the $13.65 price Michael Dell is offering in his $24.4 billion bid to take it private.

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.”