News Column

Post-Buyout, Dell Prepares to Transform

September 14, 2013

By Kirk Ladendorf, Austin American-Statesman

dell takeover, buyout

Sept. 14--Michael Dell's successful campaign to buy out the computer company he founded turned into a grueling year-long marathon.

And now the really tough race begins.

The CEO's message to employees so far has been: Get ready for big changes.

"Dell needs to transform and we need to do it quickly," the 48-year-old company founder wrote to workers in a recent letter. "The technology landscape has fundamentally changed since the company was founded and success requires this transformation."

The company founder's message to shareholders was that the computer maker needed to go private in order to give it more freedom and speed in taking bigger risks to reshape the business. A private company, he argued, can focus on long-term goals and not be distracted on meeting quarterly profit targets set by Wall Street.

Dell and his financial ally, Silver Lake Partners, are expected to complete the buyout within several weeks and take the company private soon afterwards.

While the Round Rock company gets ready to remake the business, it is among a group of former personal computer powerhouses that are searching for a new game plan. Dell's arch-rival, Hewlett-Packard Co is embarked on a long-term reorganization under new CEO Meg Whitman, although it is remaining a public company. And Microsoft Corp., Dell's long-time software ally, has started on its own reorganization effort, with the restructuring of its senior executive ranks and the announcement that CEO Steve Ballmer will step down within a year.

Why all the upheaval? Because the information technology industry is in the middle of a major shift. The personal computer, which was at the center of information technology for more than two decades, now finds itself in a global sales slump with declining prices and profits. PCs are being challenged by the rise of mobile devices, including smartphones and tablets as an alternative way to get access to personal and business data online. The problem is that all three PC-centric players, Dell, HP and Microsoft, have failed at least once in gaining a solid foothold in mobile devices. The only PC maker with a sizable business selling mobile devices is China's Lenovo Group.

If that weren't enough change, business customers are pushing for far more efficient ways of spending on IT. One leading option is cloud computing, in which companies can share, rather than own, the expensive computer and networking hardware than runs their key software applications and controls their Internet presence.

For the tech companies that can navigate all these changes successfully, the eventual rewards should be renewed growth and profits.

But analysts are divided on whether Dell is going to join the ranks of the new high-tech winners that emerge over the next several years.

'Blood, sweat and tears'

Even industry analysts who are optimistic about Dell's future have to acknowledge that the company's long-term outcome is uncertain.

"There are enormous obstacles," said analyst Roger Kay with Endpoint Technologies Associates. "No one said this was going to be easy. All Michael Dell has promised is blood, sweat and tears."

Kay notes however that Dell brings considerable assets to build on, including a global brand and business operations and established connections with the key players in the electronics supply chain.

Another company asset, Kay says, is CEO Michael Dell.

"Michael Dell is acutely aware of (the problems the company faces) and he is dealing with them," the asset said. "He is thoughtful. He is smart. He is not afraid to make decisions. He has a lot of experience and the right connections. It is hard to think of who can do that job better than he can."

Dell's transformation process has been in the works for five years or longer. Over that time it has paid more than $13 billion to acquire more than two dozen companies involved in data storage, networking, software, security and services. Virtually all those acquisitions have been focused on delivering more advanced products to so-called "enterprise" customers, that include mid-sized companies and government agencies around the world.

But the company's overall growth has stalled. Its revenue dropped 8 percent last year to $56.9 million. In the latest quarter, revenue was flat from a year ago, but profit plunged by 72 percent.

Skeptical analysts ask why the company hasn't accomplished more on its turnaround so far. Dell "has been trying to turn itself around since (2006) -- that is seven and a half years," noted Cindy Shaw with Discern Inc. in a recent report. "What has changed in recent years? The environment and end markets have gotten tougher. Dell has made progress, but we don't think it has, or can obtain rapidly enough, the leadership, personnel, culture, cash or cash-flow needed to permanently reverse its downward course."

Michael Dell has about $4.5 billion in cash and stock invested in the turnaround. And the company will be saddled with the burden of paying down an estimated $16 billion in debt financing to help pay for the $24-billion-plus buyout. Several senior executives at the company also are minority shareholders. But the company's more than 109,000 worldwide employees are betting the next few years of their careers, at least, on the idea that Dell makes good on its turnaround, which mean stock options in the future if the company goes public again. Most of Dell's sales and most of Dell's workers are outside the United States. As of the end of its last fiscal year, some 62 percent of its workers were outside the U.S., with sizable contingents of workers in China and India.

The company has about 40,000 workers in the U.S., of which about 14,000 work in Central Texas. Are workers are involved in sales, marketing, product engineering and development, administration, management and services. Dell also has one manufacturing operation left in Austin, where some of the company's most advanced servers are built.

Taking aim at Hewlett-Packard?

As it plots its future, analysts say, Dell will be competing against four major rivals -- IBM Corp., HP, Cisco Systems Inc. and Oracle Corp. -- to offer a full range of IT hardware, software and services to enterprise customers. Part of the process, observers say, will be choosing the right targets and the right partners.

The obvious target is Hewlett-Packard, which has been Dell's primary rival for years.

"HP is the biggest and weakest company in Dell's space so they are natural target," said analyst Rob Enderle with the Enderle Group. "They are attempting to do a turnaround on a tight budget."

The attack on HP already has begun. In its just completed second quarter, Dell dropped its prices to capture a bigger share of the market for personal computers and servers. The market share lower to Dell's move was HP.

If HP is the big target, some analysts say Oracle Corp. is a potential ally. Oracle, which has been a leading supplier of business database software for years. It bought hardware maker Sun Microsystems in 2010, but Sun is not a leader in making and selling servers based on Intel Corp.'s processors, which form the largest segment of the server market. Analyst noted that Oracle referred to Dell as its hardware "platform of choice" at a recent trade show, the analyst Patrick Moorhead with Moor Insights & Strategy. Oracle, Moorhead believes, needs a bigger hardware maker to partner with, while Dell could benefit from Oracles deep customer ties to the enterprise computing market.

The exact path Dell takes on its turnaround campaign is uncertain, but analysts have some ideas on what "success" would look like. It would mean a retooling and expansion of the company's portfolio of hardware, software and services. That will probably require buying at least a few more promising tech companies to add to Dell's portfolio. It also means more hiring of engineers, software developers, service professionals and advanced sales people who are better trained to sell the company's increasingly sophisticated mix of products.

In addition, there is likely to be more hiring in emerging markets as Dell attempts to capture a bigger share of business in places where there is expected to be more growth, including Asia, Eastern Europe and Latin America.

All those efforts will likely require more workers or the shifting of existing workers into new positions. There probably would be some employment growth in Austin, analysts say, but more growth in places where Dell has acquired new companies, including Silicon Valley and Minnesota as well as those emerging markets, where Dell needs to find and win over more mid-sized business customers.

If Dell can recapture a formula for winning more revenue and profit growth, then the company might re-emerge as a public company with a new stock offering and a more appealing story to investors.

And what if Dell's turnaround doesn't work? That could lead to retrenchment and downsizing. Or it could eventually lead to selling the company.

Cindy Shaw says one potential future for Dell is as the hardware arm of Microsoft.

She notes that information technology always has been a turbulent business where lots of once-promising companies disappear into acquisitions.

In the 1970s, she said, an East Coast company, Digital Equipment Corp., rose to prominence based on its leadership in mid-range computing. But DEC eventually faded and it was sold to Houston-based Compaq Computer Corp., a PC pioneer, in the 1990s. Compaq, in turn, was sold to HP in 2002.

"In 10 to 20 years, we may ask 'Remember Dell?' in the same way old-timers ask 'Remember DEC?' " Shaw wrote.

But analyst Moorhead argues that it is far too early to sing Dell's swan song. Instead, he says, the very turmoil that is shaking the IT industry creates new opportunities for companies that move rapidly.

"The market leaders don't necessarily have the advantage in a shifting-sands environment," Moorhead said. "Dell has a shot. Speed of execution is the key. The current leaders (in computer hardware) aren't known for being fast. What we are missing today is an enterprise player that can move quickly."

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(c)2013 Austin American-Statesman, Texas

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Original headline: For Dell, now comes the hard part

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Source: (c)2013 Austin American-Statesman, Texas


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