The privatization of Dell Inc. closes a number of chapters for the company and puts it more firmly on a different course. The Dell of yesterday was primarily a consumer company with a commercial business, both with a transactional model. The new Dell is planned to be a commercial-oriented company with an interest in the consumer space. The commercial side of Dell will attempt to be relationship driven while the consumer side will retain its transactional model. The company has some solid products, channels, market share, and financials that can carry the company through the transition. However, it will take years before the new model is firmly in place and adopted by its employees and channels and competitors will not be sitting idly by. IT executives should expect Dell to pull through this and therefore should take advantage of the Dell business model and transitional opportunities as they arise.
Shareholders of IT giant Dell approved a $24.9bn privatization takeover bid from company founder and CEO Michael Dell, Silver Lake Partners, banks and a loan from Microsoft Corp. It was a hard fought battle with many twists and turns but the ownership uncertainty is now resolved. What remains an open question is was it worth it? Will the company and Michael Dell be able to change the vendor’s business model and succeed in the niche that he has carved out?
Dell’s New Vision
After the buyout Michael Dell spoke to analysts about his five-point plan for the new Dell:
- Extend Dell’s presence in the enterprise sector through investments in research and development as well as acquisitions. Dell’s enterprise solutions market is already a $25 billion business and it grew nine percent last quarter – at a time competitors struggled. According to the CEO Dell is number one in servers in the Americas and AP, ships more terabytes of storage than any competitor, and completed 1,300 mainframe migrations to Dell servers. (Worldwide IDC says Hewlett-Packard Co. (HP) is still in first place for server shipments by a hair.)
- Expand sales coverage and push more solutions through the Partner Direct channel. Dell has more than 133,000 channel partners globally, with about 4,000 certified as Preferred or Premier. Partners drive a major share of Dell’s business.
- Target emerging markets. While Dell does not break out revenue numbers by geography, APJ and BRIC (Brazil, Russia, India and China) saw minor gains over the past quarter year-over-year but China was flat and Russia sales dropped by 33 percent.
- Invest in the PC market as well as in tablets and virtual computing. The company will not manufacture phones but will sell mobile solutions in other mobility areas. Interestingly, he said Dell is a commercial seller more than in the consumer space now when it comes to end user computing. This is a big shift from the old Dell and puts them in the same camp as HP. The company appears to be structuring a full-service model for commercial enterprises.
- “Accelerate an enhanced customer experience.” Michael Dell stipulates that Dell will serve its customers with a single-minded purpose and drive innovations that will help them be more productive, grow, and achieve their goals.
Strengths, Weaknesses, Challenges and Competition
With the uncertainty over, Dell can now fully focus on execution of plans that were in
place prior to the initial stalled buyout attempt. Financially Dell has sufficient funds to
address its business needs and operates with a strong positive cash flow. Brian Gladden,
Dell’s CFO, said Dell was able to generate $22 billion in cash flow over the past five
years and conceded the new Dell debt load would be under $20 billion. This should give
the company plenty of room to maneuver.
In the last five quarters Dell has spent $5 billion in acquisitions and since 2007 when
Michael Dell returned as CEO, it has paid more than $13.7 billion on acquisitions.
Gladden said Dell will aim to reduce its debt, invest in enhanced and innovative product
and services development, and buy other companies. However, the acquisitions will be of
a “more complimentary” type rather than some of the expensive, big-bang deals Dell has
done in the past.
The challenge for Dell financially will be to grow the enterprise segments faster than the
end user computing markets collapse. As can be noted in the chart below, the enterprise
offerings are less than 40 percent of the revenues currently and while they are growing
nicely, the end user market is losing speed at a more rapid rate in terms of dollars.
Dell also has a strong set of enterprise products and services. The server business does
well and the company has positioned itself well in the hyperscale data center solution
space where it has a dominant share of custom server sales. Unfortunately, margins are
not as robust in that space as other parts of the server market. Moreover, the custom
server market is one that fulfills the needs of cloud service providers and Dell will have
to contend with “white box” providers and lower prices and shrinking margins going
forward. Networking is doing well too but storage remains a soft spot. After dropping out
as an EMC Corp. channel partner and betting on its own acquired storage companies,
Dell lost ground and still struggles in the non-DAS space to gain the momentum needed.
The mid-range EqualLogic and higher-end Compellent solutions, while good, have stiff
competition and need to up their game if Dell is to become a full-service provider.
Software is growing but the base is too small at the moment. Nonetheless, this will prove to be an important sector for Dell going forward. With major acquisitions (such as Boomi, KACE, Quest Software and SonicWALL) and the top leadership of John Swainson, who has an excellent record of growing software companies, Dell software is poised to be an integral part of the new enterprise strategy. Meanwhile, its Services Group appears to be making modest gains, although its Infrastructure, Cloud, and Security services are resonating with customers. Overall, though, this needs to change if Dell is to move upstream and build relationship sales. In that the company traditionally has been transaction oriented, moving to a relationship model will be one of its major transformational initiatives.
This process could easily take up to a decade before it is fully locked in and units work well together. Michael Dell also stated “we stand on the cusp of the next technological revolution. The forces of big data, cloud, mobile, and security are changing the way people live, businesses operate, and the world works – just as the PC did almost 30 years ago.” The new strategy addresses that shift but the End User Computing unit still derives most of its revenues from desktops, thin clients, software and peripherals. About 40 percent comes from mobility offerings but Dell has been losing ground here. The company will need to shore that up in order to maintain its growth and margin objectives.
While Dell transforms itself, its competitors will not be sitting still. HP is in the midst of its own makeover, has good products and market share but still suffers from morale and other challenges caused by the upheavals over the last few years. IBM Corp. maintains its version of the full-service business model but will likely take on Dell in selected markets where it can still get decent margins. Cisco Systems Inc. has been taking market share from all the server vendors and will be an aggressive challenger over the next few years as well. Hitachi Data Systems (HDS), EMC, and NetApp Inc. along with a number of smaller players will also test Dell in the non-DAS (direct attached server) market segments. It remains to be seen if Dell can fend them off and grow its revenues and market share.
Michael Dell and the management team have major challenges ahead as they attempt to change the business model, re-orient people’s mindsets, develop innovative, efficient and affordable solutions, and fend off competitors while they slowly back away from the consumer market. Dell wants to be the infrastructure provider for cloud providers and enterprises of all types – “the BASF inside” in every company. It still intends to do this by becoming the top vendor of choice for end-to-end IT solutions and services. As the company still has much work to do in creating a stronger customer relationship sales process, Dell will have to walk some fine lines while it figures out how to create the best practices for its new model. Privatization enables Dell to deal with these issues more easily without public scrutiny and sniping over margins, profits, revenues and strategies.
Dell will not be fading away in the foreseeable future. It may not be so evident in the consumer space but in the commercial markets privatization will allow it to push harder to remain or be one of the top three providers in each of the segments it plays in. The biggest unknown is its ability to convert to a relationship management model and provide a level of service that keeps clients wanting to spend more of their IT dollars with Dell and not the competition. IT executives should be confident that Dell will remain a reliable, long-term supplier of IT hardware, software and services. Therefore, where appropriate, IT executives should consider Dell for its short list of providers for infrastructure products and services, and increasingly for software solutions related to management of big data, cloud and mobility environments.