3 Reasons Dell Went Private
Last month, Michael Dell tweeted a message that resounds globally:
"Welcome to the world's largest start-up!"
After an exhaustive, lengthy process of trying to take Dell private, Mr. Dell's mind is at ease. The deal is complete.
But now, his mind is again racing, just in another fashion — moving from ideation to implementation. Let's look at three reasons that going private was a good move for the company.
Reason 1: A platform for transformation
Armed with $1,000 in his college dorm room, Mr. Dell founded Dell in 1984. Just 15 years later, the company boasted the top spot for the following three segments: PCs in the world for large and medium businesses, PCs in America, and worldwide workstation shipments. Two years later, it became the number one PC system manufacturer on earth.
Now, nearly 15 years since these first accolades, Dell once again is expanding on repositioning efforts. If history is any indicator, we may see some top spots in coming years.
And if Mr. Dell's leadership record is not enough, consider the company's strengths, including customer loyalty. Dell didn't lose a single large customer during the choppy waters of the past year. In fact, some of its large clients drafted contingency plans in case Mr. Dell would no longer be the CEO.
Further, Dell boasts more than 140,000 channel partners, which generates about 35% of the firm's commercial revenue; seven years ago, no revenue came through these channels. Additionally, Dell continues to grow its $21 billion enterprise business, which is already up 110% in 5 years, an average of 22% annual growth. The target: $40 billion.
Imagine the progress that can be made when Mr. Dell holds the reins and is only responsible to the primary shareholder, himself.
Reason 2: Less paperwork, more productive work
As a private enterprise and unlike its primary competitors, Dell is not required to meet shareholder or analyst expectations. Plus, the company can forego quarterly or annual filings with the SEC, expensive IR associated costs, and dividend and buyback measures, among other processes involved with being a public company.
Assuming Dell spent the same amount on dividends and buybacks as it has the past 5 years, this cash flow would exceed the monthly interest payments to the banks that lent cash to Dell for the buyout. That equation is pretty good, especially considering the potential future dividend increases had it stayed public and the extra cash it will have to invest or pay down additional debt.
So, with less distractions and more control, Mr. Dell is now building on his vision.
Reason 3: 'Cash Flow' and 'Growth'
The first two reasons fuel the third: Mr. Dell's vision to transform his company into a global powerhouse that emphasizes customer needs and a long-term time horizon. How? Grow fast and generate cash.
One way Dell expects to achieve this goal is by targeting mid-size companies, the fastest growing portion of the vast $3 trillion IT business. So, let's run some numbers. According to Mr. Dell, Dell owns 2% of the market and no competitor owns more than 5%. If Dell can capture just an extra .25% growth within the fastest growing segment of the market, it will generate $7.5 billion — not bad.
Additionally, Mr. Dell will invest more heavily in R&D, something shareholders seemed to dislike, while building out the company's customer base. Mr. Dell even plans to sell PCs as a loss leader, considering 90% of its PC users buy extra services or products.
As a result, competitors like Hewlett-Packard, which are still under the watchful public eye and are subject to quarterly reports, may be in for a harsh awakening.
His final, forward thoughts
As Mr. Dell said:
We still have a long way to go and many challenges to meet.... But under a new private company structure we will 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. Our 110,000 team members worldwide are 100 percent focused on our customers and aggressively executing our long-term strategy for their benefit.
Time will tell if Dell's historical indicators will prove correct.
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