Editor’s Note: Obinna Igwebuike is the Co-Senior Partner at Sawubona Advisory Services Limited, a Consulting, Venture Management and Corporate Finance advisory firm, based in Lagos, Nigeria. He can be reached via o.igwebuike@sawubonang.com
Why is Dell going private? Many analysts believe it is because we are in the post-PC era (where Tablets rule), therefore this is an attempt by the business to recoil into a shell and plan its way through an era laden with industry-wide threats. I am not so convinced this is the primary reason. Articulated with more immediacy, the reason for Dell’s decision is that Wall Street has factored this threat into the price of the stock and Dell is currently trading at a massive discount from other businesses in the technology industry.
Looking at the historical prices of stocks in the tech industry between November 12, 2012 and February 12, 2013, we see that HP stock has traded between $11.71 & $17.25, Google, between $642.26 & $787.37, Cisco, $16.82 & $21.27, Oracle, $29.58 & $35.28 and Microsoft, $26.37 & $29.08. Apple has traded between $439.88 & $589.53 and Yahoo!, $17.24 & $21.21. Some of these stocks have actually lost value over this period. Dell has traded between $9.06 and $13.79. Considering the demand side pressure that the ‘private-ization’ announcement would have brought to the stock, it is important to state that as at January 31, 2013, just about when speculation about this move started, the stock was trading at $13.24.
If the price of a stock is a proxy for investors’ confidence in the ability of a stock to produce value in future, this seems like a clear vote of no confidence on the Dell business. This has obviously worried the business’ Founder and CEO, Michael Dell. In essence, Wall Street does not think the business is strong enough to compete in an industry that is notoriously known for its fast cycle. This is not hard to see. The stock’s peaked at $58.13 on March 15, 2000 (although this was at the peak of the dot.com boom) and it has lost 43% of its market value in the last 5 years.
I want to agree with the line of thought espoused by Dave Gardner of Gardner and Associates and Tech Blogger at fastcompany.com. The problem with Dell is not exactly the threats in its external industry environment. In my opinion, Dell has done quite well in reacting to this threat by expanding its value proposition beyond cheap-priced PC hardware it was initially known for, through its direct to consumer sales model. Dell now has an end-to-end solutions business model. The business now sells servers, non-PC enterprise hardware, software, and other technology services for individuals, businesses of all sizes and governments. Unfortunately, with the ‘mainstream-ness’ of Dell’s loss of market share in an already flagging PC market (Dell’s market share has reduced from 16.6% in 2006 to 10.7% in 2012) in the whole narrative, Wall Street doesn’t seem to see Dell beyond its traditional ‘cheap-PC retailer’ toga. With cloud computing, there are significant opportunities in the Server business, obviously the software business, especially in the developing world is huge, and services offer tremendous opportunities. Unfortunately, Wall Street has given more attention to Dell as a dying PC-hardware business.
Wall Street’s Indictment
The move to take Dell private is not, like some analysts reason, a last-ditch attempt to save a sinking ocean liner. It is actually an indictment on Wall Street that a business with a clear strategy of how to get itself out of oblivion, has to do it away from the prying eyes of an institution that was created to give businesses the financial muscle to carry out such moves. Let’s face the truth, even though it is less risky (though more expensive) to source funding from the capital markets, Wall Street can be an overhanging burdensome disturbance (pardon my repetition, as this needs to be emphasized) on an organization’s long term strategic planning.
By doing this, Dell will be saved from the madness of having to meet analysts’ estimates every quarter (and yeah, every year). This is a time to take a long-term approach to restructuring this business and of course, public quotation would not allow that to happen. This is not a time for the kind of short-termism sometimes needed to please Wall Street. Also, the cost of regulations that come with public listing is something the business can do without at this point.
Downsides of Going Private
Of course, there are downsides to this move. With Microsoft contributing potentially $3 billion to finance the deal, some analysts believe this is a Microsoft move to, in a sophisticated and expensive way, use Dell as a sales agent for its software solutions. This argument is hard to fault, but I think it is harder to affirm.
By far the most significant possible downside to this deal is that by going private, Dell cannot use its stock as cash for acquisitions. This argument is a strong one, because on the surface, it looks like Dell’s success at reducing its exposure to the PC-hardware business (which is currently about 60% of its revenues), is dependent on its ability to buy (or acquire) its way out of the PC business. I think the question to ask is; are acquisitions the way out for Dell? The answer to this depends on what side of strategy one stands on, but I guess Dell can do without blockbuster acquisitions. The issues around the business have been well documented and any business it approaches for an acquisition will see Dell as desperate for survival and that’s the one position Dell does not want to be in. Such a deal will most likely be overvalued and Dell would most likely, in the long-term, overpay for such a deal. It is time for Dell to make, create and innovate in-house.
Shareholder Concerns
The deal has suffered some kind of set-back over the past few days, as some shareholders believe it massively undervalues the business. Well, this is a question of pricing and I believe that this can be negotiated and current can be given more premium on the current price. There has been an increase in demand for the stock (which we can attribute to the announcement of the deal and this has reduced the rate offered as premium on the price as at the day it was initially announced), but if the shareholders believe that it is the right move for the business, there can be an agreement on price.
Sign of things to come
The biggest loser in all of this is Wall Street. Its short-term approach has been well document and I remember during my time in Business School, my cohort has the most robust debates when we argued for and against the current quarterly reporting system. It just prevents CEOs from thinking long-term. I imagine that Dell will be the first in a list of businesses (especially in technology) that will go private in the next few years. HP and maybe Yahoo! seem like they need a solution like this.
Of course, there are lots of risk factors in this deal; every deal of this size and scope will carry significant risks. However, this is not an attempt for Dell steal air to stay alive. This is not a desperate Hail Mary pass. This move is stellar and is happening at just the right time.
Dell’s decision to fire Wall Street could be a seminal event in the technology industry. As for the question of how successful, in absolute terms, this deal will be for Dell, I am not so sure because I do not know all the ingredients that need to go into the recipe to create a successful Dell. However, I am sure of one thing that should not be in that recipe – the overbearing pressure on the business from a shortsighted Wall Street.
