Michael Dell and the Power of Being Private

Rob Enderle
Slide Show

Seven Evolving Leadership Qualities for the Twenty-First Century

Ahead of Dell World, I had a chance to talk to Michael Dell about a number of things. His competitors had been saying that he’d be buried under debt and I wanted to check on that. I also wanted to find out how the company had changed, how customers were reacting, and if he was enjoying his new Tesla S (I’m kind of a car nut).  I got answers to all this and more.

The Economic Power of Being Private

Michael was clearly a bit upset about how his effort, which had been very hard fought, was being positioned as a competitive disadvantage. He went into depth about the massive cost of being a public company of Dell’s size. He would spend up to $2 billion annually on stock buy backs, dividends and the massive amount of compliance efforts required of the firm. This was a massive amount of resources off his bottom line and the debt service he exchanged this for by going private was $750 million. Certainly a significant amount, but the money being saved now by being public could go into R&D, market expansion efforts, acquisitions, and paying down debt.

This last showcases a key advantage to being private: You could pay down the debt and reduce the debt service, but as long as you were a public company, there was no real way to avoid much of the cost associated with being public, and you’d still have to pay dividends and do stock buybacks to support the stock price regularly.

Partnering vs. Competing

The stock analysts like to see firms invest in competing in trendy areas like cloud computing because they know this will drive higher stock values. This can leave the company spread far too thinly in highly contested areas like smartphones, cloud services, and tablets. Being private frees Dell up to adopt a partnering strategy. It doesn’t have to chase every trend; it can partner with the companies that are already successful and, by not becoming a competitor, it can more easily sell to these firms.


You see, companies don’t like to use vendors they compete with, so by taking a partnering stance, Dell can sell more servers and support services to companies like Microsoft. This forms a cleaner partnership, rather than the screwy competition/partner strategy many of Dell’s peers have formed. Microsoft was even comfortable providing a significant amount of funding to Dell to take it private, which should make Dell and Microsoft stronger partners over time.

Dell’s Customers

Apparently, customers have been very happy with the changes they have seen in Dell. I not only heard this from Michael but from actual Dell customers, who report that the firm seems much more interested in their wellbeing since going private. Large investors take tons of executive time to care for and feed, and they drive firms to cut support and client care costs. Without that pressure, Dell was free to focus more time on these customers and they both noticed and appreciated it.

The contrast was Mark Hurd at HP, who cut customer programs and laid off staff aggressively to keep the stock analysts happy; he instead lost the support of customers and employees, who really hated the guy. (I shudder when I think about what he must be doing to Oracle.) Dell doesn’t have to sell out employees and customers to make stock analysts happy and this appears to be positively affecting customers’ satisfaction and employee loyalty.

Big Bets

One of the other things going private has done is freed up the company to make big bets and bold moves. While Michael declined to give details when asked about emerging technology waves like 3D printing/scanning, robotics, and super capacitors (which could revolutionize mobile and wearable products, not to mention electric cars), he indicated he had active programs in most of these areas.

Expect something amazing from the new Dell next year.

Tesla

We did talk about Michael’s car. I’ve driven the Tesla S on several occasions and it is truly amazing. Apparently, he is very happy with the car. I asked that he watch the inside tread of his rear tires because excess wear there has resulted in a large number of blowouts. This is only on the high-performance model and apparently it is a combination of excessive camber to improve handling and the heavy regenerative breaking and torque of the high-performance model. (I share this for those who have one. This is apparently difficult to catch and a blowout at speed, including on a rear tire, can be catastrophic even in a car as well built as a Tesla S).

The reason I know about this tire problem is that I live in Silicon Valley, where Teslas must breed like bunnies because we are up to our armpits in them.

Wrapping Up: The New Dell

I noticed two other things during our chat. One was that Michael was far more relaxed than I’ve seen him before (thus the car chat). The other was his response when I asked him what Dell would look like when it goes public again. While I don’t recall it word for word, what I walked away with was the impression that he wanted to say: What, are you stupid? Going private has taken away much of what I hated about being a CEO, improved customer and employee loyalty, and made the firm more agile. Why would I ever want to go public again? It was very clear that being private has changed both Dell and Michael’s job for the better, which supports the conclusion that, while painful, it was a brilliant move.

And that, my friends, is the power of being private.



Add Comment      Leave a comment on this blog post
Dec 18, 2013 5:11 PM Bill Bill  says:
"you’d still have to pay dividends and do stock buybacks to support the stock price regularly." This is an insane statement. Public companies are not required to pay dividends nor are they required to buy back shares. Neither of these are "costs" that decrease earnings anyway. They're capital decisions. The best public companies operate with the mindset of making good capital decisions regardless of what the market thinks about them. What you have espoused here is a weak CEO or management team that does things, or doesn't do them, because of how they will appear to the Street. That's pathetic management. Reply
Dec 19, 2013 7:13 AM Brian W Brian W  says:
Dell going private has put it at a tremendous disadvantage. 1) They must cut prices in the low-end in order to maintain/grow revenue in order to service debt. However, IT decision-makers have moved away from Dell in the short-term as they wait to see how Dell does in a turn around, so Dell has only compressed their margin to zero without growing revenue or gaining market-share. 2) They must focus on the few growth areas in the PC market, primarily he Ultraslim, convertibles, hybrids, and AiO segments. However, with HP and Lenovo, both of which are in strong financial positions competing heavily in innovative technologies in this segment, they are sucking the oxygen out of these growth areas. Dell is not in a financial position to invest or compete with Lenovo or HP in capital intensive premium PC product development. 3) Dell is trying to growth their software and services in order to provide end-to-end solutions, but their integration of these has been poor to non-existent. In conclusion, Dell has 9 to 12 months to demonstrate clear traction in their turnaround, but with shrinking margins and stagnant revenue, Dell's collapse is only a matter of time. Reply
Dec 19, 2013 8:55 AM Jack Jack  says: in response to Bill
What cloud are you living on ? The vast majority of public companies devote an enormous (insane ?) amount of effort (time and money) to keeping the Wall St. analysts happy, and trying to manage the quarterly stock price (oftne by doing things that damage the long term viabilty of the company). The primary driver for this acticity is the fact that most senior exec's comp is tied to quarterly stock price. It may well be pathetic management, but it is pervasive as well. Reply
Dec 25, 2013 1:10 PM E. Maha Jan E. Maha Jan  says:
Rob - do you have (like Roger Kay does) a consulting relationship with Dell? In other words, does Dell pay you at all ? Reply
Dec 29, 2013 12:15 PM Bill Bill  says: in response to Jack
The cloud I live on is one where I manage in excess of $600 million for a mutual fund. I'm one of those people who these companies would want to "keep happy." We specifically try to stay away from companies that play the Wall Street quarterly earnings game, and there are lots of them who don't, all over the world. So I very, very much know what I'm talking about when I say that the original article is stupid because it allows management to blame its former status as a public company on its own fecklessness and weakness. Reply
Jan 2, 2014 9:00 AM WhoCares WhoCares  says: in response to Bill
So Bill, in other words, you have a vested interest in keeping companies public so you have shares to work with... i.e. a vested interest in Wall Street not going away... If you're going to sit there and say the quarter to quarter game of Wall Steet hasn't had many negative consequences... and then blame it on management that is compensated based on shareprice meeting their obligation to drive share price, and doing it successfully... I think you're definitely biased. At present just look at what appeasing The Street has done. Strategies like offshoring,etc. have done. Market values are at an all time high... job market and personal income for workers is at relative lows... Maybe Dell is pointing the way to something better. Who can say? Time will tell. Reply

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