When Michael Dell in 2013 took his namesake company private, he spoke about the need to move out from under the thumb of Wall Street if he was going to accelerate the vendor’s transition from a PC maker to an end-to-end IT solutions and services provider. It’s difficult to make decisions and moves that might have long-term benefits at the expense of short-term gains when a company has to report its financial numbers every quarter. Michael Dell talked about wanting to be rid of the 90-day shot clock. As a result, since Dell went private, the industry has gotten few peeks at the company’s finances.
However, Dell’s $67 billion bid to buy data storage giant EMC and its federated companies—one such move that could mean pain in the early years but ultimately prove a boon to the company—has given the industry a window into how Dell has been doing since going private more than two years ago.
EMC officials on March 14 filed a lengthy document with the Securities and Exchange Commission (SEC) meant to lay out all the information its shareholders will need when they vote on whether to accept Dell’s offer at a meeting in the coming weeks. The 348-page document touches on everything from the makeup of both Dell and EMC to the reasons for the deal to the challenges a combined company will face.
One of the points it outlines is the finances of both companies. What it shows of Dell is a company that is battling declining revenues and yearly losses, and one that still garners the bulk of its sales from a PC business that is still being battered by a global market that has been contracting for almost four years.
According to the document, in the 12 months ending Jan. 29, Dell’s revenues came in at $54.9 billion, down from the $58.1 billion the previous fiscal year. Also in the most recent year, the company lost $383 million, more than the $422 million the company lost the year before.
In the SEC filing, Dell officials said that the 6 percent decrease in net revenue was caused primarily by lower sales in the PC, software and services businesses. Dell, the world’s third-largest PC maker, generated 65 percent of its revenues from its Client Solutions business unit, and it was that PC business that contributed most to the revenue decreases.
The officials also wrote about the efforts to transform Dell into an enterprise IT provider that can better compete with the likes of Hewlett Packard Enterprise, Cisco Systems and IBM. Over the past several years, Dell has spent billions to build up its offerings in such areas as networking, storage, security, software and the cloud.
“Dell seeks to build superior customer relationships through its direct business model and its network of channel partners, which includes value-added resellers, system integrators, distributors, and retailers,” the officials wrote in the filing. “A key component of Dell’s strategic transformation is to continue shifting its product and services portfolio to offerings that provide higher-value and recurring revenue streams over time. As part of this strategy, Dell is continuing to expand and enhance its offerings through acquisitions and strategic investments that will complement its existing portfolio of solutions.”
They also defended keeping the PC business, saying that “Dell’s Client Solutions offerings are an important element of its strategy, and Dell believes that the strategic expansion of this business is critical to its long-term success.”
The global PC market has been hurt by the rise of smartphones and tablets in recent years, as well as the decision by many PC users to hold onto their systems longer than in the past. Dell officials acknowledged that its heavy dependence on the PC business for its revenues is a challenge, but added that it’s still an important part of the road map going forward.
Dell Sees Revenue Declines, Plans Asset Sale After EMC Deal
Dell’s acquisition of EMC would mark the largest deal in IT industry history. Michael Dell and other company executives have said that bringing in EMC and its various companies—including VMware, RSA, Pivotal and VirtuStream—will significantly bolster Dell’s capabilities in such areas as data storage and virtualization. It also will present integration challenges and will hang a debt of more than $50 billion on Dell.
In the SEC filing, Dell and EMC officials said that the combined company in the first 18 to 24 months after the deal closes will focus on paring down that debt, reiterating that the company will do so by selling off some of its non-core assets, though they did not outline which assets will go. Dell reportedly already is looking to sell some of its assets before the deal is complete, including its SonicWall, Quest and Perot Systems services units.
However, they also reiterated that the merged company would not use VMware’s money or debt capacity to help pay off the larger debt, and that VMware will not be liable for any of that debt. The share prices of both EMC and VMware have fallen since the deal was announced in October 2015, and among shareholder worries was that Dell would lean on VMware once the deal closed to help pay the debt. Dell officials have promised that won’t happen, and they reiterated that in the SEC filing.
Dell and EMC officials still expect the deal to close sometime between May and October, which would put it about two years after Michael Dell first contacted EMC CEO Joe Tucci about the idea.