Dell's dire earnings present dim hope for turnaround

Investors still clinging to the stock are looking to the company's founder and private equity shop Silver Lake Partners to complete their proposed buyout.

By The Fiscal Times May 20, 2013 12:35PM
Man with laptop copyright Comstock Images, JupiterimagesBy Suzanne McGeeThe Fiscal Times logo

It shouldn't have come as a great shock to anyone that Dell's (DELL) fiscal first-quarter results, reported Thursday, were rather dire. 

At least the company did turn a profit, but it earned a mere 7 cents a share, a far cry from the 36 cents a share it posted in the year-earlier period. 

The big hope for those investors (as opposed to traders) who still are clinging to the stock is that the company's founder, Michael Dell, and private equity shop Silver Lake Partners, can complete their proposed $24.4 billion buyout before too much more financial blood is spilled.

Or is the company engaging in some kind of devious and underhanded conspiracy to make its results look worse than they really are, and whip up support for a bid, even if it's not one that reflects the company's real value? 

That, media reports suggest, is what Southeastern Asset Management has implied in its comments that Dell may be exaggerating its financial peril. Of course, Southeastern has its own vested interest at stake: It has teamed up with noted activist investor Carl Icahn to make its own offer. Dell's board still hasn't commented on this proposal, which involves current shareholders hanging on to their stock, while receiving a one-time payout of $12 a share in either cash or additional stock.

At the moment, Dell's shares are changing hands for only about $13.40 a share, below the $13.65 a share that Michael Dell and Silver Lake are prepared to offer to take the company private. Shareholders, it seems, believe that Dell's fundamentals are deteriorating and that even if the first-quarter earnings don't reflect the full ability of the company to turn a profit -- Dell acknowledged that it cut products in order to boost its market share and that it spent money in other areas to boost its longer-term competitive position, eating into its bottom line -- there are real grounds for concern.

Certainly, the rate of the decline in sales of personal computers seems to be growing in spite of the best efforts of Dell and its rivals. According to IDC, PC shipments plunged 14% in the first quarter of 2013, nearly twice as much as expected. Far from helping to boost PC sales, the release of Windows 8 may even have caused consumers to think twice about upgrading. 

Blackstone (BX), after sniffing around Dell in initial excitement, almost scrambled to get away from bidding for the company, citing that "unprecedented" decline in PC volumes, which it described as "inconsistent with Management's projections for modest industry growth" and "the rapidly eroding financial profile of Dell." Presumably, the savvy number crunchers at Blackstone are able to look at a set of financial statements and look past any window-dressing to get to the real picture -- and they have concluded that it isn't a pretty one.

Investing is all about risk and return -- and specifically, weighing one off against the other. For the vast majority of investors, the balance now is tilted heavily in the direction of "risk" when it comes to Dell. In light of both the industry trends and the company's own financial statements, there seems to be little reason to expect that Dell suddenly will start generating impressive gains in revenue or profits. Nor, given that Blackstone has retreated from the fray, does it seem probable that another bidder for the entire company will emerge at this late hour. After all, as Weil, Gotshal and Manges noted in a recent review of "going private" transactions, the proposed Dell deal and the purchase of H.J. Heinz by Berkshire Hathaway (BRK.A) and private equity firm 3G Capital, mark the first "mega-sized" deals since the financial crisis of 2008-2009.

The real significance of Dell's lousy earnings performance may lie in the challenge it presents to whomever the new owners and management turn out to be. The latest numbers make clear that remaining public is only likely to increase the hurdles the company must confront. Who wants to try to keep restless shareholders satisfied in the short term, while undertaking the kind of long-term transformation that obviously is needed if Dell is to survive, much less thrive? This may still become the greatest corporate turnaround story of the decade -- but the risk that it will fail is far too high for most investors to tolerate.

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

More from The Fiscal Times

May 20, 2013 1:08PM
Dell's being replaced by Acer, Asus and Lenovo while HP's trying to not become the next victim and Chinese innovation and mobile PC shifts. My next Ultrabook will probably be a Lenovo U or Z model.
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