By Ben Pimentel
SAN FRANCISCO--With his plan to take Dell Inc. (DELL) private,
Michael Dell opens a new chapter in his journey from bad boy to
bruised veteran of the tech industry, the pioneer who got some
things right, and others wrong.
The $24.4 billion buyout deal is his latest big bet aimed at
clearing the path in Dell's bid to transform itself into a
formidable corporate IT powerhouse, though some analysts say going
private isn't going to get rid of the company's daunting market
challenges.
Why is the founder and CEO of Dell taking the company
private?
"Reputation and greed, in our view," Discern analyst Cindy Shaw
said in a note. "We believe Mr. Dell is once again hungry. Thirty
years ago, we think he hungered for success and wealth. In 2013, we
think he hungers to restore his legacy and personal balance
sheet."
Mr. Dell's legacy is marked by a maverick streak and a
reputation as a disrupter.
He famously annoyed Steve Jobs by publicly saying in 1997 that
if it were up to him to decide what to do with the then-struggling
Apple Inc. (AAPL), he would "shut it down and give the money back
to the shareholders."
A decade ago, he strongly suggested that Sun Microsystems was
doomed.
Mr. Dell was wrong on Apple and right on Sun, whose CEO, Scott
McNealy, had once dismissed Dell as "the greatest spare-parts
distributor out there."
That attack was based largely on the business model Mr. Dell
cooked up as a teenager, selling PCs out of his University of Texas
dorm room--and which helped him shake up in the tech industry and
compete against much older and larger rivals such as
Hewlett-Packard (HPQ) and International Business Machines
(IBM).
Mr. Dell kicked off his storied career by selling PCs directly
to consumers, doing away with middlemen. And he did it fast, with
pretty much no inventory and negligible investment in research and
development, relying mainly on the innovations of his two key
partners, Intel Corp. (INTC) and Microsoft Corp. (MSFT).
By the early 2000s, Dell was the king of PCs, besting even H-P,
which initially could not keep up with the Texas juggernaut even
after the Silicon Valley icon gobbled up Compaq Computer.
Some of Dell's rivals dismissed the company as the Wal-Mart of
the tech industry, deriding it as a lowly assembler and reseller of
other companies' innovations. But Dell's direct-sales model was so
successful that Mr. Dell gambled by taking on the server market. It
worked, turning Dell into a server powerhouse, outmaneuvering the
once-dominant Sun Microsystems. He then took aim at additional
markets, including handsets, networking gear and printers.
Just 10 years ago, Dell was on a roll. Asked by a New York Times
reporter about repeated criticisms of the Dell model and direction,
Mr. Dell quipped, "I've seen this movie before. Hey, order the
popcorn. I'm going to enjoy it."
But then the market changed. PCs lost momentum. Consumers turned
to new devices, as seen in the rise of smartphones and tablets.
Mr. Dell still could bank on a lucrative business selling PCs to
corporations, but, in search for new growth, he took another gamble
by taking aim at the more profitable market for data-center gear
and services. To lead this new transformation, Mr. Dell, who had
stepped down as CEO while staying on as chairman, returned to the
post in 2007.
"We're making a pretty fast transformation," he told MarketWatch
in late 2011. "It's working." In fact, it wasn't working fast
enough.
Dell's high-margin corporate IT businesses were growing, but the
shift meant a slump in sales, aggravated by a dramatically
shrinking PC market. Skepticism on Wall Street has been growing,
which undoubtedly meant more pressure on Dell and Mr. Dell.
He admitted as much in an email to employees Tuesday, after the
buyout deal was announced. "Dell's transformation is well
underway," he wrote, "but we recognize it will still take more
time, investment and patience."
To be sure, going private would give Mr. Dell more time and
money. But in his latest gambit, success is not guaranteed.
"Going private doesn't make the problems go away," Sterne Agee
analyst Shaw Wu said in a note.
Despite its successes in the corporate IT market, Dell is facing
stiffer competition in a consolidating market. For example, onetime
partners, such as Hewlett-Packard and Cisco Systems (CSCO) are now
fighting it out in the server and networking markets.
Business-software behemoth Oracle Corp. (ORCL) became a player in
the hardware space after it bought Sun.
Still, Mr. Dell can certainly build on key strengths. Ms. Shaw
of Discern offered one scenario in which Dell emerges as a
"disruptor."
In it, she said, Dell "hits the reset button, hard, and uses the
cloak of privacy to do to enterprise IT what it did to PCs many
years ago -- rethink the business model."
"This could hurt traditional enterprise IT leaders in the way it
hurt early PC leaders," she continued. "Dell may accept low margins
on many or all of its innovative products and services in the short
term to build market share, with the side effect of being able to
expand margins and thus boost earnings per share growth as it
prepares for an initial public offering."
Meanwhile, Dell faces the same dilemma faced by H-P: what to do
with its PC business.
After toying with the ideal of junking it, H-P has decided to
keep its PC business. Some analysts believe Dell would do the same,
even if it means staying in a shrinking and increasingly
unprofitable market. That's because of the many benefits of staying
in the market, including the ability to keep the Dell brand
visible, particularly in corporate IT, said IDC analyst Bob
O'Donnell. "No one sees the names of the servers and the back-end
infrastructure but the IT guys," he told MarketWatch. "There's
something to be said about having that brand in front of your face.
That's really important."
But O'Donnell was critical of Dell and Mr. Dell's attitude
toward the market segment that made him successful in the first
place: consumers.
"They would go through periods when they are serious about it,
and then they would step away," he said. "Right now it's a good
time to be more focused on commercial than consumer. Longer term, I
think it always tends to come back."
But it would seem Mr. Dell is sticking to his current strategy,
stressing to employees the plan "to deliver enormous customer value
through end-to-end solutions that are scalable, secure and easy to
manage."
"I am committed to this journey," Mr. Dell also told his
employees.
And the journey may have a long way to go. Dell, who was 19 when
he started the company, is turning 48 this month.
"He's a young guy," said IDC's O'Donnell, "and he's got a big
future still to go."
And Mr. Dell has many strengths to build on, Discern's Shaw
argued, saying in her note: "While we doubt he is as hungry or
energetic now as he was in his youth, today he has the advantages
of a global footprint, brand-name recognition and connections."
Write to Ben Pimentel at bpimentel@marketwatch.com
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