All Sorts of Things

Random posts on all sorts of things designed to inform and provoke.

Technology: Dell Lacks Strategic Outlook and Purchase Expensive at Current Price Levels

DELLOver the past few days, Dell Corporation’s return to the news cycle has caused the company’s stock price to rise to levels not seen in years. This unprecedented news – CEO Michael Dell stated he was considering taking the company private in 2010 – does, however, raise questions about why anyone would want to purchase the company at the projected price levels.

To begin with, 70 percent of Dell’s sales and 60 percent of its profit comes from a market – personal computers (PCs) – that has seen declining sales for years: worldwide PC shipments shrank 4.9 percent and 6.4 percent in the third quarter of 2012 according to Gartner and IDC respectively. Dell also stands out as a particularly laggard performer in this market as its sales declined 21 percent in the same period and the company fell further behind its competitors Hewlett-Packard (HP) and Lenovo.

The only sector of the company that has seen growth is the servers and networking division for corporations and government agencies but Dell faces formidable competition from Amazon.com in that arena and any legitimate market analyst will admit that the latter is a fearsome foe indeed.
Dell, therefore, generated a majority of its profit from a declining market in which it is a weak performer. Furthermore, it faces strong competition from a much limber company in the only sector where it has shown any growth. Consequently, the future of this company – as it stands now – does not look positive.

Proponents of this sale have pointed to Dell’s strong cash balance – about $11.3 billion in cash and short-term investments as of November 2, 2012 – as a positive data point. However, buying a company for its cash resources is like exchanging one stack of cash for another; the balance provides a good return for those involved in the buyout but doesn’t necessarily help long-term investors especially since the company has almost $5 billion in long-term debt.

In addition, while Dell did generate about $3.7 billion in cash from operations, consider that on revenues of $13.7 billion, it made a profit of $589 million in the last quarter. Clearly, this is not a lean company and this makes its chances of surviving against Amazon.com very remote.

Even if Dell’s buyout were to go through at the proposed price levels, could the leverage buyout (LBO) market handle a deal of this size? Reports have stated that at a price between $13.50 and $14.00 per share and adding in the takeover premium, the equity price could reach over $23 billion. While CEO Michael Dell’s 15.7 percent stake eases the pressure somewhat even Goldman Sachs suggested that Dell’s LBO would be a challenge and Bernstein Research analysts said the odds of the buyout “are probably low.”

Regardless of the possibility of this deal, I propose any buyout won’t solve the underlying problem with Dell. Indeed, investor expectations may hurt the company even more if they expect a quick turnaround that is unlikely to happen if the company does not change. One option would be to follow the IBM model and convert Dell into two distinct companies: one focused on the computer business and the other on the services and consulting arena. This would allow Dell to make the necessary changes to become a lean and focused corporation and remain a viable player in the industry. Unless this happens, a buyout, even if it happens, will simply delay what seems like Dell’s inevitable end.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Information

This entry was posted on January 16, 2013 by in Global Economy and tagged , , , , , .
%d bloggers like this: