The conventional wisdom regarding Dell's $24B LBO goes something like this: As a private company, Dell will be able to take steps to reinvigorate its business that wouldn't be possible in the glare of the public markets. This wisdom suggests that Dell has a bold strategy for reinventing itself that will require doing things that the public markets will not like such as:
- Accepting lower revenues and profits in the near term in exchange for hoped for future growth
- Taking unpopular steps that would open up the company to shareholder or other action.
This wisdom further suggests that the major participants in the transaction – Michael Dell, Silver Lake Partners, and Microsoft – are betting billions of dollars on a high risk strategy that feels a lot more like a massive venture capital play than a buyout.
If this is indeed the plan, then investing in the LBO would appear to be a pretty bad idea, especially since there doesn't seem to be anyone who can offer a plausible idea of what Dell's bold new strategy might be.
However, I don't think this is what Michael Dell, Silver Lake and Microsoft have signed up for. The number of high tech companies that have reinvented themselves after their core business had matured is pretty small. The only three that come to mind are Apple (via the iPod, iPhone, and iPad), IBM (via Services), and Lotus (via Notes). On the other hand, I can think of dozens who never recovered and either folded or were sold for a bargin price. Here are a few notable ones: Sun, Silicon Graphics, Novell, Data General, DEC, Wang, Cray, Informix, Sybase, 3Com, and Lucent.
Instead, what seems to be going on here is a much more typical Private Equity investment – Maximize Return on Equity by:
- Taking on debt,
- Shuttering unprofitable lines of business,
- Milking mature product lines, and
- Investing just enough in your core products to keep the revenue engine going.
In Dell's case, this means saying goodbye to smartphones, tablets and any other innovative consumer products, managing a slow decline in the PC business to maximize its profitability, and focusing primarily on the midsized datacenter market, which represents about half of the business today. Part of focusing on the datacenter means increasing the share of revenue that comes from services. While Wall Street hates services businesses, they do generate profits, which will help maximize ROE. Perhaps the best way to think of this strategy is as IBM-lite.
If you attribute the company's poor performance in 2009 and 2010 to the financial crisis and instead focus on the $4.6B Dell earned in 2012 before taxes, depreciation, and amortization, then $24.5B looks like a pretty good deal that will pay very high returns on equity.
So, don't expect to see a new, exciting direction from Dell or another attempt to reinvent the business. Instead, what you are likely to see a mature company with flat or declining sales that pays off handsomely for its owners. It probably isn't Michael Dell's ideal vision for the future of his company, but it will make him quite a bit richer. I just wish that I could invest.