Dell: In Search of a Private Road

When I hear the expression used, “We are trying to change the tires while the car is still moving,” I cringe. Even the most efficient tire changers in the world, the NASCAR pit crews, still require the vehicle to come to a full stop. Wall Street doesn’t allow full stops. Dell, while having done quite well turning its business model towards wider IT systems and services, based mainly on a slew of enterprise IT oriented acquisitions, initially punctuated by the purchase of Perot Systems over three years ago and underscored by the addition of ex-IBM and ex-CA Technologies turnaround specialist John Swainson in 2012 to run software, isn’t quite a NASCAR pit crew.

Today’s announcement of the pending leveraged buyout clearly is intended to give Mr. Dell the room and time he needs to take his foot off the quarterly brakes without the spreadsheet-toting stare of Wall Street handing out traffic violations. The drama of the largest privatization in the history of information technology may not quite have ended, however, because the deal still needs to go through a long list of approvals, with Dell allowing for a healthy six month window before close.

But assuming the deal closes, what would a private Dell look like? Despite the Wall Street Journal’s uncharacteristically tabloid-like analysis, ESG does not believe Mr. Dell is worried particularly about his legacy in the PC business. Dell has been shifting toward being a more general purpose IT supplier in areas like professional services; infrastructure, including servers, storage, and security; and more recently, further up the stack, as exhibited by its acquisition of Quest Software. ESG sees three avenues of effort Dell will or could pursue post-privatization:

  1. IT Services and Systems (not including PCs): Despite less than green light macroeconomic conditions, Dell timed and positioned its move to the general purpose IT supplier space well in terms of the competition. Among services and systems providers, IBM remains a service-driven premium brand and HP has struggled. Cisco’s entree has aimed for specific targets and lacks services, and the other outsourcing and services organizations lack the servers and infrastructure software Dell brings to the table. Dell has found a growing position in the middle, and has successfully carried some of its more positive brand attributes to IT – good quality, fairly priced, and has earned a reputation as a decent partner. In addition, Dell has been able to target the midmarket from the get-go, and only chased enterprise accounts from the periphery, with the exception of key Perot legacy accounts.

    In terms of the privatization, ESG does not see Dell changing direction in this space; it has been on the right track. Dell, however, accelerated on private cloud much faster than public cloud, maybe not the best strategy in retrospect. All the big systems players are keeping a sharp eye on Amazon Web Services (AWS), and if AWS adds private and hybrid cloud offerings a brand new race will commence. Dell might need to invest more heavily in public cloud to stay relevant.

  2. PCs and End-User Devices: PCs were always the pace car for Dell, and even though Dell has not been able to maintain pace during the move to mobile, tablets, iOS and Android, Dell will not likely steer away from this business in the near term. Dell, a master of manipulating the supply chain, will adapt to the demand, maintain reasonable margins, and use this as a cash cow for other endeavors. Microsoft has helped fund the privatization which only makes sense given that Microsoft needs Dell to help make Windows 8 a success, and Dell needs Windows 8 to offer some kind of beachhead against Apple and Google.

    Dell, however, has a huge opportunity to skip a generation in terms of end-user devices due to privatization. Will e-paper devices be next? Who knows, but the type of R&D required to jump back into the next end-user device pursuit will be considerable, will require a culture change at Dell (note to Michael Dell – it isn’t only about supply chain and web/social media), and you can trust that Apple, Google, and Samsung are already prototyping “what’s next?” And on that subject...

  3. What’s Next?! The greatest challenge and opportunity afforded Mr. Dell through the privatization is an opportunity to change Dell. All due respect, but Dell has not exhibited much thought leadership since its original foray into PCs when it redefined the market, and when it understood and acted upon the channel implications of the Web and big box stores. Wall Street has usually rewarded innovation, and arguably Dell’s privatization has come about because Dell has been playing catch-up, to various degrees of success, over the past decade.

    While the privatization will afford Mr. Dell the opportunity to adapt to market conditions, and ESG feels Dell has proven that it can do so successfully in terms of IT services and systems, the trick is for Dell to learn how to take a pole position again. Privatization affords Dell the opportunity to invest in more start-ups, to remove Dell from constantly trying to tune up the old engine, to create more of a Silicon Valley racing culture for at least part of Dell. If you only plan to drive the speed limit, why bother with a private road?

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