Can Dell save itself by going private?

CEO Michael Dell, who owns 15% of the company's stock, would probably love to escape the constant scrutiny of investors focused on the short term.

By The Fiscal Times Jan 16, 2013 6:17PM
Image, Money and computer copyright Angel Muniz, JupiterimagesBy Suzanne McGeeThe Fiscal Times logo

Personal computers aren't going the way of the buggy whip just yet, but the industry's seemingly inevitable decline continues. 

Worldwide PC shipments in the fourth quarter of 2012 totaled only 90.3 million units, down 4.9% from year-earlier levels, Gartner Inc. reported Monday.

That, analysts at the technology research and advisory firm argue, reflects something more than just a weak economy. As consumers transition to smartphones and tablets, even the launch of the Microsoft's (MSFT) new Windows 8 operating system didn't send consumers scurrying off to upgrade their hardware. It didn't help that, as one Gartner analyst suggested, the most appealing Windows 8 products were in scarce supply and overpriced to boot.

In such a changing, even hostile, environment, it would be foolish of leading PC makers like Hewlett Packard (HPQ) and Dell (DELL) to sit idly by and simply watch as their market, and market share, dwindles. 

HP's shipments fell year over year, even as it clung to the title of the top computer-maker in the world, with 16.2% of the market in the fourth quarter. Dell, once the world's No. 1, has fallen to third behind Lenovo. Dell's share of the market shrank to 10.2% from 12.2% a year ago. The question is what to do about it -- what strategic direction to pursue? And what form of business structure is best suited to that pursuit?

Even as the Gartner data hit the headlines, so did one possible answer. Bloomberg reported, and others confirmed, that Dell is in talks with two large buyout firms, TPG and Silver Lake. Discussions have reportedly progressed far enough for banks to have been contacted about providing the financing for what could be a deal valued at north of $20 billion -- one of the biggest in history and the largest contemplated since the last buyout bubble burst in the second half of 2007.

There's a certain allure to the idea. CEO Michael Dell, who owns 15% of the company's stock, would probably love to escape the constant scrutiny of investors focused on the short term. That interest in quarter-to-quarter earnings can't help but be a distraction at a time when the company really needs to be searching for a bigger reinvention -– a way to remain relevant even as PC owners abandon their Dells in droves to jump aboard the tablet bandwagon. It will take patience for Dell to build up a presence in storage, software and services, and the market isn't known for its patience with such uncertain turnaround plays.

The problem? It's not at all certain that the banks would be willing to finance such a huge deal for a company facing a massive challenge to its core business. And even if they are, Dell may find he has replaced one form of tyranny for another by replacing annoyed shareholders with vigilant bondholders anxious about how much leverage a post-LBO Dell would have on its books.

Then there is Hewlett-Packard, whose woes make Dell's challenge look downright simple. HP's PC division is contracting rapidly and sales from its other business divisions are failing to pick up the slack. Investors have even less reason to trust Hewlett Packard’s ability to steer a path to growth, given the egg on the face of management and the board in the wake of the $8.8 billion writedown tied to the acquisition of Autonomy.

Are there still benefits in Hewlett-Packard remaining a single company? Calls for a breakup of the company are rumbling, although they aren't as loud or as immediate as those surrounding a buyout at Dell. CEO Meg Whitman has publicly dismissed the idea; she's not interested in presiding over a shrinking company, it seems.

That's logical enough, but it may come down to whether the company shrinks as a whole or whether it is broken into discrete businesses -- with the PC division likely to be by far the smallest compared to the company's printing or enterprise hardware operations. It's hard to see how a breakup wouldn't be best for shareholders, given the fact that HP, over the years, has become almost a de facto holding company, with much of the bureaucracy and inefficiencies that implies.

In both cases, the odds are against these companies ever returning to their glory days.

Suzanne McGee is a columnist at The Fiscal Times. Subscribe to The Fiscal Times FREE newsletter.

3Comments
Jan 17, 2013 10:47AM
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Yup use to have Dell.....Didn't even price last time because of priceing/deals through HP, and Gkids recommendation(computer whiz)....Have full blown systems HP w/25" and Laptop with 16-18", all we are going to need for a while..

 

But never had issues with Dell...They need to jumpstart themselves. 

Jan 17, 2013 10:17AM
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The PC market will never die completely, but the strategy has to change.  You cut overhead in the PC department until it makes a profit.  You increase the quality of components and slow the refresh cycle.  This seems at odds with what has been happening, but it really is going to be more of a niche market.  Then the PCs becomes the base of your reputation and you grow in other areas.  The problem is most of the PCs out there do everything 90% of the market needs, as seen by the growth moving to smart phones and tablets.  So what are some of the potential growth areas?  The old Atari operating system on a chip which is uncorruptable and faster idea may be a possibility to revisit.  Streamlining operating systems so they do more with less lines of code.  Assessories that allow gamers a better 3D experience.  Combining lightweight 3D googles and games with sometype of workout system such as a treadmill harness system that allows you to "run", jump and crouch in all directions like a huge rollerball mouse.  Another idea, which I saw in infancy would be getting your computer to connect to a bicycle where the handle bars actually affected where you went and of course controlled the resistance for hills, etc.  Again, where you could log on and ride against/with other riders, again with 3d googles or a screen in front of the bike, or just run a program.  However, this idea would work with smartphones/tablets also.

 

Basically, the only areas for growth for your high powered PCs are related to gaming, exercise, and music/video production..and replacing dead PCs. These are all niche markets.  People are beginning to realize that for the internet, increased speed is only helping the advertisers and not their internet experience.  Word processing is fine on all current models.  Everything else can be done on the smart phone or tablet.  So a company that accepts that fact will reorder their business to be profitable with smaller sales that produce a reputation for highest quality, long life, and support with reasonable pricing and an emphasis on interfaces/software that tap into impressive assessories.  For instance, a maker of top line exercise equipment shouldn't have to know computers and worry about them.  Upgrades to the exercise experience would come through interacting with computers/software from others.  All they would need is to make sure their equipment have the ports/robust interfaces to connect and a decent screen.

 

Jan 17, 2013 1:34AM
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No, they should get their PC mojo back like Lenovo has with the Yoga 11 and 13. It may be too late to do that and that's really sad but only the paranoid survive.
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