Arik Hesseldahl

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With Its Buyout Battle Won, What’s Next for Dell?

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Asa Mathat | D: All Things Digital

Michael Dell and the private equity firm Silver Lake today walked away with their prize, the computing company Dell, having won the approval from a significant majority of shareholders to take the company private in a $25 billion leveraged buyout.

Success for Dell as a private company — which it will be within a few months — is by no means assured. Simply put, the plan calls for Dell to double down on investments in research and development and acquisitions that will be intended to expand its reach into enterprise-focused businesses including software, services and cloud computing. The personal computer business — both consumer and business-focused — which accounts for most of Dell’s revenue will become less of a focus.

These are investments that Dell the company couldn’t make while still meeting the quarterly growth targets that public shareholders expect and demand. As Michael Dell put it on a conference call with analysts today after news of the shareholder vote was released: “… Under a new, private company structure, we’ll have the flexibility to accelerate our strategy and pursue organic and inorganic investment — without the scrutiny, quarterly targets and other limitations of operating as a public company.”

Dell hearkened back to his past, saying “we plan to go back to our roots,” with a more nimble operating model driven by what he called “the entrepreneurial spirit that made Dell one of the fastest-growing, most successful companies in history.”

He outlined a five-part strategy to make it happen: Aside from boosting R&D spending, Dell will seek to boost its sales reach by going after emerging markets and expanding its relationships with resellers. (At least part of that strategy has been shared with analysts already.)

There will also be new investments in PCs and tablets, he said. Even though the PC market has slowed down at a rate not seen in its history so far, Dell said continued participation in those markets will be “critical to our financial and cash flow models.”

In a way, Dell is facing a problem similar to that of its rival Hewlett-Packard: It needs the PC business in order to fuel its expansion into other areas. Two years ago, when that company contemplated spinning off its personal computer business, it was in order to grow its presence in enterprise, software and services. When Meg Whitman became CEO, she reversed the decision, arguing that the PC business gave the company sufficient scale to negotiate effectively with suppliers, and that it also helped cash flow.

So what will success at the new Dell look like? Without the ability to review financial results, it will be hard to judge. But for a hint of how the new Dell will behave, look back to May, when in a series of interviews Michael Dell shared early results of an analyst report showing that the company had taken server business away from HP. When business is humming, expect Dell execs to take an aggressive stance and publicly poke its rivals at every turn.

Expect more acquisitions, though perhaps not at the size nor at the velocity seen in recent years. Dell has bought 20 companies in about four years, and made $5 billion worth of deals in the last year or so. CFO Brian Gladden said on a conference call today that the kind of deals anticipated will be “more complementary” to deals already done. The company is, as Gladden said today, “still digesting” some of its larger recent acquisitions. Among those are Wyse Technology, Quest Software and Compellent.

At least one reason for that is the debt the company is taking on to carry out the buyout in the first place. Gladden said on the conference call that the company will have “less than $20 billion” in debt after the close of the buyout, and that it will cost about $1.2 billion a year to service that debt. Standard & Poor’s yesterday slashed Dell’s corporate debt rating to BB- from BBB yesterday on worries that its more heavily leveraged capital structure will hold it back. Gladden seemed unworried by the amount of debt the company is taking on and described the buyout as “not an overly leveraged transaction.” He said the company could have taken on more debt, but opted not to.


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I think the NSA has a job to do and we need the NSA. But as (physicist) Robert Oppenheimer said, “When you see something that is technically sweet, you go ahead and do it and argue about what to do about it only after you’ve had your technical success. That is the way it was with the atomic bomb.”

— Phil Zimmerman, PGP inventor and Silent Circle co-founder, in an interview with Om Malik