Public or Private, Dell Needs to Change

Arthur Cole

It’s been obvious for some time that Dell is having trouble shifting from a primarily systems and hardware developer to a solutions and services provider.

In its favor, Dell has at least recognized what needs to be done and has been clear in its desire to become a top-tier provider of enterprise-class, data-center-focused technology. As for execution, however — well, the loss of nearly 40 percent in market capitalization over the past five years speaks for itself.

All of this is background for the rampant rumors on Wall Street that Michael Dell is in serious buyout discussions with various private equity firms. Taking the company out of the public realm is probably the best way to shed the hardware-dominated product lines that are faltering in the face of virtual- and cloud-based infrastructure, strategists say, because it shields the company from a lot of the external oversight and reporting requirements that burden public organizations. Names on the buyer list include TPG, Silver Lake and JPMorgan Chase, although Dell himself is likely to remain CEO no matter what happens.

At this point, it seems the major sticking point is coming up with enough cash to finance the deal. The company’s market capitalization sits at about $20 billion, which would require a deal the likes of which have not been seen before the financial crisis of 2008. That’s a pretty high bar, but not completely out of reach considering the speculation that has been driving up Dell’s share price since word of a potential sale got around. One possible fly in the ointment, however, is whether Dell will increase its already substantial debt load when all the papers are signed.

But on a more fundamental level, why would anyone want to buy a company that is so heavily steeped in the PC market? With the advent of desktop virtualization and mobile computing, the trusty PC is quickly losing its cachet as the primary interface to the digital universe. And although the company has been more aggressive than most in expanding into more profitable enterprise systems, PCs still make up about 70 percent of Dell’s revenues, according to market analyst Toni Sacconaghi.

Of course, this is where the private equity buyout might be just the medicine the company needs. If the new management were to effect a sale of the PC business in short order, a la IBM to Lenovo in 2004, a renewed Dell would have ample means to implement its E2E strategy that encompasses everything from data center infrastructure to cloud services. It’s interesting to note that many of the company’s recent acquisitions — firms like Wyse, SonicWall and Quest — offer deployment, provisioning and other management tools for a wide range of client devices. So already, whether the user or the enterprise itself is heavily steeped in Dell PCs, laptops or tablets is of little consequence to the enterprise side of the house.

In any business deal of this magnitude, there are countless ways to parse the pros and cons — that’s why venture capitalists and financial brokers get the big bucks. And in Dell’s case, the stumbling block will probably rise from the finances rather than technology. If anything, Dell probably clung to the PC sector too long and now will likely see less-than-premium offers if it does decide to spin off that division. But on the plus side, it won’t be the last platform company to get out of the PC business (can anyone say ewlett-hay ackard-pay?), and that could be in a good position to capitalize on emerging data trends if it can re-orient itself quickly and efficiently.



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