I’ve had quite a few conversations about Dell going private since the announcement. Apparently quite a few people read my post about Dell’s strategy and finances, so I figured I should write some sort of update.
The last paragraph seems somewhat prescient now, I suppose. By going private, Dell can concentrate on the transformation ahead without having to worry about Wall Street and all the short-termism and general crapness that goes with being a public company.
However, Dell will still need to keep their financiers happy. Well, sortof. This is an interesting buyout, for reasons I’ll go into… well, now.
Leveraged Buy Out
The traditional wisdom of the LBO is that it means management will start cutting left right and centre to free up cash to pay off their debtors. But this is a narrow view of LBOs, because how management functions after the buyout is very dependent on the sources of funding management use.
Your traditional buyout firms are short-term flippers. They want to turn the company around for a quick sale, i.e. under 5 years, because that’s how they return their money to their investors. Well, kindof. Research suggests1 that private equity actually suck at providing risk-appropriate returns, particularly for the sub-par funds, assuming they actually do liquidate the funds and provide any kind of return at all. While active, they tend to overstate their returns, and understate the risk.
But the Dell deal isn’t a Barbarians at the Gate style buyout. Our chief protagonist, Michael Dell, will end up with a majority share, so he gets control and is taking on appropriate levels of risk: he gets upside and downside risk. And he’s no F. Ross Johnson blow-in.
Aside: Rant on Managerial Risk
Skip this section if you don’t want to hear me rant about how crap modern management is.
The modern idea of management, i.e. the post-1970s Chicago School Friedman/Hayek fiasco, rewards senior management with loads and loads of upside risk while insulating them from any and all downside risk. The fuckers.
If you start a company, or invest your own savings, you deserve to be rewarded for taking that risk if your hard work and ingenuity pays off. Handsomely. It’s a tough gig. You can work hard and have loads of ingenuity and still lose the lot. That’s a good thing, overall.
But if all you do is get given a fancy hat and let loose to play with the dials, levers, and buttons in the engineer’s cabin, then you deserve your salary. Otherwise, buy stock with your own money like any other schlub if you want in on the deal.
Back to Dell
The privatisation deal Michael Dell has put together smells an awful lot like the man with his name on every product cracking the shits with Wall Street and telling them to all go fuck themselves because they’re killing his company. But I’m Australian, so you’d probably put it more politely.
Dell has become a large and somewhat unwieldy beast, as most success stories do at some point. The time has come for some hard decisions to be made, and, dare I say it, leadership to be shown. Good luck doing that if you’re a publicly listed corporation of any size.
The trouble with public companies is they succumb to the (thanks Geoff) OPM problem: Other People’s Money. You get a bunch of minority interests who are still ‘significant’ shareholders second-guessing your every move. Dell doesn’t have the time to placate every member of the committee. It needs someone to get out in front to point at the mountain and say “We’re climbing that. If you don’t want to come with us, fine. Bye-bye.”
I think Mr. Dell knows that. And that’s why I think he’s taking his company back.
New Ownership Structure
Michael Dell has a bunch of money already, and already owns 14% of the company. Why should he care about this? Because it’s his company. He started it. He runs it. It’s his baby. If yours was sick you’d want to fix it, too. He ends up with a majority stake, so he’s in charge.
Silver Lake are throwing in some cash, most likely because of existing personal relationships between Mr. Dell and the fund’s partners. They were also likely to have been very helpful in navigating the negotiations with the various debt facility providers.
The Microsoft $2bn loan deserves some special noting. My opinion is that it’s Microsoft desperately trying to buy customers for Windows 8. Much like their Nokia acquisition, it seems to me to be a lot like buying followers on Twitter, but then I don’t really understand why they let Steve Ballmer stay CEO, so what the hell do I know? I just hope Mr. Dell set up some sweet deals on Microsoft software and enterprise sales opportunities for the Quest portfolio.
Strategy Next Steps
Assuming the deal goes ahead, here’s what I think we’ll see:
- Asset sales. Non-strategic assets will get sold off, be they brands, products, or whole divisions. ROA is down, and Dell will need cash to finance the debt on its loans. The easiest way to do that is to get rid of stuff you don’t need, and that fits better with other companies anyway.
- The PC division is a conundrum. It throws off cash, but not really enough, but is that a good reason to sell it? Or to hold it, for that matter? If you sell it off, you cede the field to Lenovo, ASUS, and all the others. And I’d be sad, because I like my Dell laptops. The build quality on my Latitude is much better than the ASUS I bought, and better than any of the IBM/Lenovo Thinkpads I’ve used over the years. I reckon there’ll be some surgical cuts to make the PC division healthier overall. I think it fits in well with the overall Dell strategy as I understand it.
- A pivot to the enterprise. Dell got big because they were great at mass-customisation over the Internet backed by great supply chain management. That just screams cloud to me, and in a way that only Amazon seems to have figured out yet, and they’re only just starting to really pursue the enterprise market for cloud services.
- An aggressive focus on the new strategy. Some of the VPs or general managers will leave. From what I saw on display at Dell World 2012, that’s got to be a good thing, because the VPs I watched weren’t selling me on their plans. Save the buzzwords for the analyst earnings calls, oh wait!, you don’t have to do them any more. Why are you here again?
It’s going to be loads of fun to watch.
I have nothing at stake beyond a chance to be spectacularly wrong on the Internet, and I’m far from alone there.
If it works, it’ll herald a glorious new chapter for Dell, and I quite like what I think that world would look like.
If it fails, the world will continue to look much as it does now. Bummer.
I don’t own any Dell stock, and several people have pointed out that we should all have bought stock after my analysis post because we would have made some quick money. While true, quick money is boring, and I don’t gamble.
Dell flew me to Dell World 2012, and were generally very nice to me. I rewarded them with an, at times, mean blog post and was far less fawning than the rest of the “mainstream” media reporting on the event. But I like them anyway. Was I bribed successfully? Perhaps. Will they invite me back next year? Probability: unlikely to hell no.
So I get delicious freedom to write whatever the hell my opinion is. Which changes as the information I have changes. I am fickle; I contain multitudes.
Because I’m secretly an academic at heart, here’s some actual SCIENCE! from The Literature:
1 Conroy, RM & Harris, RS. (2007). ‘How Good are Private Equity Returns?’, Journal of Applied Corporate Finance, vol. 19, no. 3, pp. 96–108.