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Dell buyout hints at painful changes ahead

Column Going private gives Michael Dell a free hand
Thu Feb 07 2013, 16:10
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DELL'S DECISION to become a private company suggests that there is short-term pain to face before the firm can realise its goal of becoming an enterprise hardware vendor and services company.

Dell's $24bn leveraged buyout that involved Silver Lake Partners, Microsoft and investment banks was probably a surefire way of stopping talk of its share price from hampering its future actions. While the firm might have avoided whispers about its financial position by going private, it suggests that a bumpy road lies ahead for the company.

For Dell, the last five years have been all but a write-off, with Michael Dell having to come back as CEO and try to recapture some of its former glory. However Dell's heyday came at a time when it was the easiest way to buy a low-cost PC, but as everyone and their dog has been saying for the past three years, this is the so-called 'post-PC era' and in that era Dell has nothing.

Dell's ill-fated Streak 5 was perhaps the first so-called 'phablet' but it was nothing short of hopeless both as a device and in its ability to generate sales. The firm tried again with the Streak 7, but once again it struck out and since then it has all but given up on tablets.

Dell might lack a smartphone and tablet business but Lenovo has, for the most part, done very well without one as well, though the Chinese PC maker is set to address that this year. Dell's biggest problem is that even in its bread and butter desktop and laptop PC business the firm has fallen badly behind its rivals, especially Lenovo.

Intel provided Dell an opportunity to reinvent its laptop business with its ultrabook marketing push, and while Dell's XPS 13 is a good machine, the company didn't update it, nor did it bring its design to other laptops. The firm still lacks headline grabbing Windows 8 machines, with Lenovo arguably doing the best job there with its Yoga laptop.

Perhaps the reason for Dell's lacklustre PC range is its apparent belief that somehow the firm has become an enterprise vendor. Dell thinks it has repositioned its brand away from the tin boxes that made it the biggest PC vendor in the world to an enterprise equipment vendor that sells servers to big businesses.

While Dell's enterprise business has been growing and the firm has been busy writing cheques to buy companies that have strong footholds in the enterprise market, such as thin-client firm Wyse, its financials suggest that it simply hasn't been making headway. The firm's last financial statement showed that revenues from its large enterprise and public sector business units fell eight percent and 11 percent, respectively, from the same period the prior year, while its consumer business revenues fell even more.

Dell and HP are essentially in the same position, which is why in some ways it is not surprising to see HP comment on Dell's leveraged buyout. Both firms want to be where IBM is, a strong IT services company that has enterprise hardware and software businesses supported by a healthy IT consultancy.

IBM's transformation took a decade and perhaps the most visible part of that transformation was its decision to sell its PC business to Lenovo. The problem Dell has is that many people, perhaps close to everyone, associates Dell with cheap tin boxes, not solid, reliable hardware, and unlike IBM it has no major enterprise software products or consulting competencies to help it become a one-stop enterprise vendor.

 

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