Why Dell Decided To Go Private

What Wall Street isn't getting.

There's much in the news about Dell's decision to go private. A lot of what I read is written by confused, disillusioned analysts and bloggers who seem to still see Dell as a personal computer company despite evidence to the contrary. I believe this factor (combined with a low stock price) is at the heart of rationale for Dell going private—Wall Street just isn't getting it. Perhaps Dell has been able to reinvent itself faster than Wall Street can digest the transformation.

This article represents my personal views of Dell going private. In the interests of full disclosure:

  • I have had no conversations with anyone at Dell about the decision to go private; no one at Dell has suggested I write this or knows that I am writing this
  • I have done consulting work for Dell and am under a non-disclosure agreement
  • I am part of Dell's Customer Advisory Panel
  • I am not a financial expert and will not pretend to understand the nuances of leveraged buy-outs
  • I do not now nor have I ever owned Dell stock
For several years now, I've watched Dell closely. I've written a great deal about Dell. I've gotten to know many executives and senior executives well. Here's my take:
  • Dell isn't just a PC company any more. At the first Dell World back in September 2011, this message was driven home loud and clear. Many in attendance seem to grasp this as their major take-away. Yet, Wall Street and many industry analysts seem to be unable to grasp this based on much that I see in print even today.
  • Dell is a customer-driven company committed to providing end-to-end solutions ranging from PCs, best-in-class servers, and other enterprise hardware, software and services solutions for any industry ranging from small and medium businesses up to the very largest global corporations and governments. To be able to do this and to grow company margins, Dell moved away from low-end, low margin PCs into higher-end PCs. Why would Dell want to dominate market share for low-end, low margin PCs? They don't. Dell is willing to cede the low end to others, a sign of maturity and wisdom, not a sign of doom and gloom.
  • When analysts report that Dell's market share is falling and the PC market is dying, me thinks they love drama. When I last checked, PC growth has slowed but not gone negative. Tablets aren't going to be the panacea some analysts believe. Traditionally, sales of PCs slow at market transition points such as the launch of Windows 8 yet little media hang-wringing bothered to include that perspective. I laugh out loud every time someone writes we're in "the post PC era."
  • Dell has acquired a number of software and hardware companies to fill in gaps in their offerings so they can better service customer needs in the markets they serve. Dell hasn't done blockbuster technology acquisitions like HP; they've focused on ingredient acquisitions. This is working well for Dell and companies they have acquired. Michael Dell announced at the December Dell World 2012 that the acquisitions binge is largely complete.
  • Dell is run by Michael Dell, a full-on, engaged, energized entrepreneur who maintains his focus on customers. I've been in a few meetings with Michael over the past few years; he is an impressive guy. How many executives have founded a company, got it to $65 billion in revenue and are still actively engaged with the company they founded? I can't think of any. While I'm sure it's not all fun, Michael is clearly passionate about Dell and Dell customers. He is also passionate about his philanthropic efforts via the Michael & Susan Dell Foundation.
  • Many of the executives who allowed their companies to be acquired by Dell did so because of Michael. They knew he would understand them and be able to relate to them. I wrote about Dell's merger and acquisition process in one of my favorite Fast Company articles: "If I Sell You My Company Will You Respect Me In The Morning?"
  • Dell has an aggressive effort to engage with entrepreneurs via Dell's Entrepreneur-In-Residence, Ingrid Vanderveldt, the Dell Women's Entrepreneur Network (DWEN) and through Dell's support of SMBs globally. Dell's CMO, Karen Quintos, invited me to participate in DWEN so I can help share the story of women entrepreneurs. I've written a few stories for Fast Company.
  • Dell has highly-qualified, very capable women in executive roles at the company. The diversity is welcome in the world of tech. I enjoy working with them and their teams.
  • Dell is committed to being a green company globally and to operating in a socially-responsible way. In 2010, Newsweek named Dell as the "greenest company in America."
  • Dell Financial Services, in conjunction with Dell OEM Solutions, is beginning to help entrepreneurs with financing to get their products to market—I have an article in process about that. This is very exciting as many entrepreneurs struggle to get funding for companies that involve hardware.
  • Dell is not HP. I see Dell as a vibrant, exciting company. HP is still trying to figure out how to transform itself. I was recently amused by an article in the San Jose Mercury News announcing a new lobby at HP's Palo Alto headquarters which HP's CEO, Meg Whitman, offered as a symbol of HP's rebirth. Golly.

Going public has traditionally been a dramatic liquidity event for the angel and venture capital investors and allowed for individuals and funds to participate in a company's future success via the stock market. I was taught that a stock price is based on "the market's" feeling about the a company's ability to generate future revenue and profits. For the last couple of years, my sense is Dell stock has been tremendously under-valued, largely due to too much hand-wringing in the trade press and analyst community. Dell may play some part in outsiders not understanding the new Dell. And, this may be in part due to the increased complexity of the company's offerings given the acquisitions. But, for all the analysts who continue to cite Dell as being a PC company, you need to pick up your game or stop covering Dell.

Being a public company has many downsides:

  • Public companies are under the gun every quarter to perform to externally set expectations or see their stock price get hammered.
  • Many companies strive to manage the stock price which tends to make them myopic, focusing on short-term and near-term not long-term.
  • There are onerous and costly disclosure and compliance requirements imposed by the Securities and Exchange Commission (SEC) plus the burden of Sarbanes-Oxley compliance, the latter certainly having inherent challenges and significant costs given Dell conducts business in about 184 countries across the globe.
There is little privacy when a company is publicly-traded creating a burden for public companies that private companies don't enjoy. Dell would benefit from being off the radar for a few years at this point. Should Dell decide to do another IPO, Dell will be in a much stronger position in 3-5 years.

If Dell was trading at an all-time high, Dell wouldn't be going private. It's this low stock price that has created this opportunity. As expected, some investors aren't happy. There are a lot of homeowners who aren't happy with the decline in their home values as well. Today's price is today's price. Why should Dell pay a premium to buy itself? The "market" has set a price—Dell is taking advantage of that now.

Are there risks to going private? Perhaps. But, perhaps there's a greater risk to not taking advantage of this rare opportunity to silence the critics, get out from under the Wall Street microscope, and let Dell go do what its customers are expecting and needing it to do. Should Dell decide to go public again, perhaps Wall Street and the analysts will recalibrate their thinking about what Dell is really doing for its customers. For the past few years, this seems to be a real challenge for them.

—Dave Gardner can be reached on Twitter and via his website at Gardner & Associates Consulting.

[Image: Flickr user Mei Ying Chan]

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2 Comments

  • Ronald Ferrill

    Dave,

    I think it is brilliant and timely.  You get many points across that are
    salient.  I especially like that you nailed the Investor Class, of whom
    I consider myself to be among, and their lack of understanding of the
    company and the industry.  Another great point is the differentiation
    with HP.  HP really lost its way. Third (among many) and most important
    from my perspective is why would any company want to be public in this
    idiotic regulatory morass if they don't have to be - the costs and
    potential threats of even greater regulatory and probable legal costs
    are ridiculous.

    Great article!

  • Richard Martin

    Hi Dave,

    Great article. You've answered many of the questions I had about this move by Dell. In particular, you've confirmed what I thought: That now was the time to move because the stock is clearly undervalued. In a few years, this could look like a brilliant move.

    Rich Martin