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Taking Dell private – the beginning or the end?

Taking Dell private – the beginning or the end?

Michael Dell made a brave but ill-advised decision to buy a second rate service provider called Perot Systems in 2009. At that time we speculated that if Dell understood the true value of the outsourcing services industry and its double figure margins then there would be an opportunity for Dell to become a giant and to rival the then mighty HP acquisition of EDS in May 2008.

The ludicrous price Dell paid ($3.9Bn) and the inept executive and second rate management he inherited from Perot predictably failed in all areas except healthcare and all geographies save the mighty US of A where Perot had critical mass. And Dell provided another example of shareholder value destruction by M&A, when the acquirer has no expertise in the acquiring company – look at HP’s increasingly disastrous handling and lobotomising of EDS, or the probable failure of Logica in the CGI family.

Dell’s stock has fallen 43% over the last five years. Now, predictably to any industry observer, Michael Dell is seeking to undertake a leverage buyout in cooperation with private equity companies TPG Capital and Silver Lake. Again Dell and financial gurus will find ways to make the spreadsheets look convincing but we believe they will again miss the core issue.

The key question for clients and investors alike is what does Mr Dell believe he can achieve? On the hardware side where prices fall even faster than Dell’s stock price, will Dell try to again copy key aspects of Apple’s success? Dell failed previously and the only reason IBM did not fail is that they could smell the wind and sold the PC Division to Lenovo. Samsung is the only worthy competitor now – Dell would be in a poor third place and we would expect it to succumb to the forces of Amazon, Google or even god forbid the Microsoft Surface. Surely Dell will not attempt the mobile market again!

Will he appeal for more time to take the services divisions on to new highs? How will being “free” of the financial markets and more opaque help success to occur? With over $12Bn invested in strengthening Storage Services, Enterprise Software and adding consulting services Dell has sought to compensate for the drop in PC hardware revenues but we just cannot see how being private will help sales.

At a $19Bn Market CAP, and with the lowest valuation of all PC-hardware manufacturers (except HP), how can Dell possibly afford the finance costs of a leveraged buyout and deliver the kind of multiples his PE friends are looking for?

Still maybe Michael Dell is a sharp business man and maybe he knows something we do not – certainly in his 2010 speech in New York City he openly discussed the possibilities opened to him and three years later he stands ready to attempt to fulfil his dream. Certainly in being free of the quarterly scrutiny of the markets, he may have an opportunity to design a new company, leveraging his successes and failures and hitting his personal pocket. His MSD Capital personal investment fund is worth $9Bn. Apple’s market capitalization has shrunk lately to about $450Bn… and Dell’s ecosystem is positively microscopic compared to Apple’s, Google’s or Samsung’s.

In short we see a private Dell as a huge gamble and one that will be very closely watched.

Michael Dell made a brave but ill-advised decision to buy a second rate service provider called Perot Systems in 2009. At that time we speculated that if Dell understood the true value of the outsourcing services industry and its double figure margins then there would be an opportunity for Dell to become a giant and to rival the then mighty HP acquisition of EDS in May 2008.

The ludicrous price Dell paid ($3.9Bn) and the inept executive and second rate management he inherited from Perot predictably failed in all areas except healthcare and all geographies save the mighty US of A where Perot had critical mass. And Dell provided another example of shareholder value destruction by M&A, when the acquirer has no expertise in the acquiring company – look at HP’s increasingly disastrous handling and lobotomising of EDS, or the probable failure of Logica in the CGI family.

Dell’s stock has fallen 43% over the last five years. Now, predictably to any industry observer, Michael Dell is seeking to undertake a leverage buyout in cooperation with private equity companies TPG Capital and Silver Lake. Again Dell and financial gurus will find ways to make the spreadsheets look convincing but we believe they will again miss the core issue.

The key question for clients and investors alike is what does Mr Dell believe he can achieve? On the hardware side where prices fall even faster than Dell’s stock price, will Dell try to again copy key aspects of Apple’s success? Dell failed previously and the only reason IBM did not fail is that they could smell the wind and sold the PC Division to Lenovo. Samsung is the only worthy competitor now – Dell would be in a poor third place and we would expect it to succumb to the forces of Amazon, Google or even god forbid the Microsoft Surface. Surely Dell will not attempt the mobile market again!

Will he appeal for more time to take the services divisions on to new highs? How will being “free” of the financial markets and more opaque help success to occur? With over $12Bn invested in strengthening Storage Services, Enterprise Software and adding consulting services Dell has sought to compensate for the drop in PC hardware revenues but we just cannot see how being private will help sales.

At a $19Bn Market CAP, and with the lowest valuation of all PC-hardware manufacturers (except HP), how can Dell possibly afford the finance costs of a leveraged buyout and deliver the kind of multiples his PE friends are looking for?

Still maybe Michael Dell is a sharp business man and maybe he knows something we do not – certainly in his 2010 speech in New York City he openly discussed the possibilities opened to him and three years later he stands ready to attempt to fulfil his dream. Certainly in being free of the quarterly scrutiny of the markets, he may have an opportunity to design a new company, leveraging his successes and failures and hitting his personal pocket. His MSD Capital personal investment fund is worth $9Bn. Apple’s market capitalization has shrunk lately to about $450Bn… and Dell’s ecosystem is positively microscopic compared to Apple’s, Google’s or Samsung’s.

In short we see a private Dell as a huge gamble and one that will be very closely watched.

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