Dell Inc. (DELL) disclosed steep profit and revenue declines
Tuesday, but the results were strong enough to bolster investors
who say a plan to take the computer maker private undervalues the
company.
For the fiscal fourth quarter ended Feb. 1, the company said
profit fell 31% and revenue 11%. Still, the results were on the
high end of the company's earlier forecast.
Dell said two weeks ago that it had accepted a buyout offer from
founder and Chief Executive Michael Dell and others. As a result,
some shareholders were suspicious Mr. Dell and his team wouldn't be
motivated to deliver a strong quarter.
"In a management-led buyout there are obvious conflicts of
interest," said David Larcker, director of the corporate governance
research program at the Stanford Graduate School of Business.
The quarter began while Mr. Dell and his management team were
negotiating with the computer maker's board to take the company
private. It ended just days before the $24.4 billion deal, valued
at $13.65 a share, was announced.
Dell executives declined to discuss the pending buyout on a
conference call with financial analysts. Mr. Dell didn't
participate on the call because of his involvement in the deal. The
company also declined to give current-quarter guidance.
People who were involved in the negotiations have said they
anticipate shareholders will accept the offer in large part because
of the industry-wide decline in PC sales. The final 2012 calendar
quarter, which included the holiday shopping season, was among the
most disappointing ever for PC sales, with world-wide shipments
declining 4.9% from a year ago, according to research firm
Gartner.
Dell has been hit harder than most competitors. In the Feb. 1
quarter, its revenue from PCs fell 20% from a year earlier to $6.9
billion. The machines account for 48% of Dell's revenue.
For the last few years, Dell has been tacking away from its
reliance on PCs, building out a portfolio of products and services
that it can sell to businesses. These include security software,
storage systems, networking gear and the like, all of which usually
have higher profit margins than PCs.
Brian Gladden, Dell's chief financial officer, said the company
was moving forward with that strategy.
In the fourth quarter, sales of the company's servers and
networking gear climbed 18% to $2.6 billion. Sales in its storage
business dropped 13% to $434 million, while sales of services
declined 3% to $2.1 billion.
Overall, Dell said net income for the quarter totaled $530
million, or 30 cents a share, down from $764 million, or 43 cents a
share, a year earlier. Revenue was $14.3 billion, down from $16
billion a year ago.
Dell on Feb. 5 agreed to a buyout deal led by Mr. Dell, who owns
around 14% of the company, and Silver Lake Partners, a private
equity firm. Mr. Dell first approached the company's board about
taking the company private over the summer, and negotiations took
place throughout the fourth quarter, according to regulatory
filings.
More than half of Dell's unaffiliated shareholders will have to
approve the deal. So far, holders of about 15% of the shares have
said they plan to oppose it, including Southeastern Asset
Management Inc., the company's largest outside shareholder, which
has said it thinks Dell's value is closer to $24 per share.
A person familiar with Southeastern's thinking said on Tuesday
the firm is focused on the percentage of Dell's profits that come
from software, storage systems and other non-PC businesses.
Mr. Gladden said Tuesday the company's enterprise solutions and
services business, which houses many of these products, accounted
for "well over half our gross profit."
The person familiar with Southeastern's thinking said this
business and other more profitable ones should command a higher
multiple than PCs. If Dell were to continue on its current path of
fewer PC sales but more sales of software, it could become a
smaller but more valuable company, the person said.
Mr. Dell's offer doesn't factor this in. "They are shrewdly
playing a hand dealt to them by the PC market," the person
said.
Management-led buyouts are complicated because the management
team has an incentive that isn't necessarily aligned with
shareholders' interests. "It casts everything they do under the
light of is this being done to their advantage, whether it's true
or not," said Charles Elson, director of the John L. Weinberg
Center for Corporate Governance at the University of Delaware.
Nick Tompras, president of Alpine Capital Research, which owned
2.2 million Dell shares as of Dec. 31, was concerned that
management might try to report a poor quarter but was pleasantly
surprised by the results.
Mr. Tompras, who is opposed to the current offer, said the
results give "shareholders a little bit of a reason to argue for a
higher price." He adds: "Why would the founder of the company want
to buy back the company if he was pessimistic about its
future?"
Dell shares were down a cent at $13.80 in 4 p.m. trading on the
Nasdaq Stock Market and up about 1% after hours, when they traded
at 30 cents above the current offer price.
Write to Ben Worthen at ben.worthen@wsj.com
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