Wednesday, April 3, 2013

Dell is going private – But can it survive?



Recently, Dell laid out a powerful case for going private and accepting a $24.4 billion offer from Silver Lake partners and Michael Dell. Dell, which at one time became the world’s largest PC manufacturer, is now conceding ground to the smartphones and tablet markets6.

Michael Dell, who founded the company, focused for many years on operational excellence. They were the cheapest personal PC provider- had the best operations, cost efficiency and used some of the best supply chain techniques. During a golden period, especially in the late 90s when the ‘Wintel’ (Windows + Intel) market exploded, Dell was there to take advantage of it4. In early 2000s they became the world’s largest personal PC providers. What is important to note is that Dell was never into R&D and building products, it left that to Microsoft and Intel4.  Instead it focused on cost efficiency and diligent use of resources. Some of the initiatives did not work out, like outsourcing customer support to vendors in India.

Suddenly, the market shifted and Dell through no fault of its own (Well, maybe they should have seen this coming) found themselves struggling. Operations-wise, other companies have caught up. While the world moved on to smartphones and tablets as newer and better platforms (like Android) emerged, Dell was still focusing on its core business, core customers, core technology and doing what it does best4. Probably they thought that the PC market would remain viable forever, or they wanted the new markets to mature before stepping into them. We don’t know. Despite making some acquisitions in the cloud software market, they major source of revenue is the PC market which is consistently declining4.

Dell’s decline will also affect Microsoft. In fact, if we go into the details of the proposed takeover, Microsoft has loaned $2 billion to the investors Michael Dell and Silver Lake3. This move makes sense for Microsoft as its Windows business is also under threat from market competitors. By making an investment of this size, they have ensured that Dell will be a long term customer3. Also, Dell’s focus will shift purely on to Microsoft’s platform for its data center3. Microsoft needs Dell to be successful again and this investment does prove that intent.

Going private also makes sense for Dell as a company. It can now make investments and pursue riskier strategies which would otherwise have been criticized by the shareholders3. Michael Dell has a huge responsibility as a leader to shift Dell’s focus towards innovation as opposed to focus merely on operational efficiency. But can he change his ideals before reinventing his company, only time will tell3.

Also if the proposed takeover does go through Dell needs to answer many tough questions as it charts its course for the future. The first and foremost – Where does Dell belong in the PC market and who do they want to be in that market? The PC market is declining. There is little value add and the market is shifting towards notebooks, tablets and low end desktop PCs. Dell’s core strength is in XPS and Latitude series1. Does it continue focusing on those, trying to fight for a market share in a declining market or does it shift its focus1. Since PCs still contributes the most to Dell’s revenue, they might want to continue expanding in that business but they must reinvent themselves and find ways of providing value to their customer1. Michael Dell has recently promised investments in PCs and tablets2.

Secondly, how can the corporate markets, where Dell has a good market share be leveraged to bring in further revenue? According to Michael Dell, the company wants to position itself as an end-to-end IT solutions provider for its corporate customers. Also, a lot of corporate clients will be looking to move from windows xp/vista to windows 7/81. Corporates, rarely ever change software, without refreshing their hardware as well. So there could be many such orders lined up for Dell in the coming months. Thirdly, is complete reliance on Windows, the right option? Dell’s strategy seems to be tying them down to the Windows platforms while other companies are diversifying into different platforms1. Are the server and data center revenues going to increase down the line? Last quarter, Dell earned $9.3 billion from their Servers and Networking Business units (up 11%)1. Facebook has been pioneering the Open Compute initiative which publishes specifications on building your own servers from no-name manufacturers. This initiative could be a threat to Dell’s business in the future1.

Dell needs to answer these questions (and possibly many more) if it wants to survive in the market. Industry voices predict that Dell will become obsolete in the future but I believe that Dell does have a chance to bounce back, provided it does not make the mistakes of the past.

Sources
1.       Hachman, Mark. "ReadWriteenterprise." ReadWrite. Readwrite Enterprise, 20 Feb. 2013. Web. 03 Apr. 2013.
2.       Whitney, Lance. "Michael Dell Promises Greater Investment in PCs and Tablets." CNET News. CBS Interactive, 02 Apr. 2013. Web. 03 Apr. 2013.
3.       Hachman, Mark. "ReadWriteenterprise." ReadWrite. Readwrite Enterprise, 5 Feb. 2013. Web. 03 Apr. 2013.
4.       Hartung, Adam. "Dell Won't (Can't) Grow - Sell DELL." Forbes. Forbes Magazine, 16 June 2011. Web. 03 Apr. 2013.
5.       Chang, Sue. "Dell Opted for Going-private Deal on Bleak Outlook." Market Watch. Market Watch, 29 Mar. 2013. Web. 03 Apr. 2013.
6.       http://online.wsj.com/article/SB10001424127887323501004578390692268605644.html

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