Private Dell – foot soldier or Major General?

Private Dell – foot soldier or Major General?

Although rumours first started on 11th January that Dell was seeking to go private, this column broke the news “officially” five days later, and it has taken until 5th February to be announced. Paying an unacceptable 25% premium on his own shares as at 11th January 2013, Michael Dell has succeeded in his ambition. Dell’s share s fell 31% last year, who else would be so bold? Why pay any premium?

Dell has yet to articulate the strategy and the future vision he sees – but isn’t that the point? Going private means you don’t need to say anything. So do not hold your breath on the “how” and the “logic for the future”. Dell’s personal pension is wrapped up in this deal, and his bed fellows are a PE company called Silver Lake Partners and the elderly Microsoft Corporation in a $24.4 Bn deal. This deal should be seen in context – it is the largest leveraged deal in the world since the beginning of the financial crisis of 2007/8. It is extraordinary and deserves a lot of attention.

The mere $2bn partner of Microsoft is not surprising – they need friends and surety for their less than popular software. Be assured that it is a token investment / loan not a full commitment. A temporary commitment no more. So what of Dell himself and Silver Lake? $10Bn of borrowing even in the depressed market of today is going to take a lot of servicing. If interest rates do increase this represents a tight noose around the neck of a company who crave less intrusion, less inspection, less clarity of purpose and holding to deadlines and performance targets. This is the essence of the logic of going private – no quarterly intrusions and justifications.

Analysts are pre-occupied with hardware and software – is Microsoft finally going into mobiles, tablets and other portable devices that that they have failed to achieve significant success in before; has Dell a master plan for tablets; etc. This is NOT where the margins are – this is where the turnover is. Turnover impresses the market, margin makes the shareholder happy. Let us not forget the services side of Dells business. Despite the reckless over-payment for Perot Systems – as we stated previously Dell has a bedrock service company. Here is where the future lies here is where the margins can be measured in double digits.
Dell’s biggest test in the coming two years will be setting out the role of services and software development and the positioning for the conventional hardware where it belongs in a defined box and marked “temporary” and more importantly “designed in US but Made in China”. Only then is Michael Dell’s future recognition assured a place in history.

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