Michael Dell has put together a hedge fund, one of his largest suppliers and some debt money to take his company, Dell, Inc. private. There are large investors threatening to sue, claiming the price isn’t high enough. While they are wrangling, small investors should consider this privatization manna from heaven, take the new, higher price and run to invest elsewhere – thankful you’re getting more than the company is worth.
In the 1990s everybody thought Dell was an incredible company. With literally no innovation a young fellow built an enormously large, profitable company using other people’s money, and technology. Dell jumped into the PC business as it was born. Suppliers were making the important bits, and looking for “partners” to build boxes. Dell realized he could let other people invest in microprocessor, memory, disk drive, operating system and application software development. All he had to do was put the pieces together.
Dell was the rare example of a company that was built on nothing more than execution. By marketing hard, selling hard, buying smart and building cheap Dell could produce a product for which demand was skyrocketing. Every year brought out new advancements from suppliers Dell could package up and sell as the latest, greatest model. All Dell had to do was stay focused on its “core” PC market, avoid distractions, and win at execution. Heck, everyone was going to make money building and selling PCs. How much you made boiled down to how hard you worked. It wasn’t about strategy or innovation – just execution.
Dell’s business worked for one simple reason. Everybody wanted PCs. More than one. And everybody wanted bigger, more powerful PCs as they came available. Market demand exploded as the PC became part of everything companies, and people, do. As long as demand was growing, Dell was growing. And with clever execution – primarily focused on speed (sell, build, deliver, get the cash before the supplier has to be paid) – Dell became a multi-billion dollar company, and its founder a billionaire with no college degree, and no claim to being a technology genius.
But, the market shifted. As this column has pointed out many times, demand for PCs went flat – never to return to previous growth rates. Users have moved to mobile devices such as smartphones and tablets, while corporate IT is transitioning from PC servers to cloud services. iPad sales now nearly match all of Dell’s sales. Dell might well be the world’s best PC maker, but when people don’t want PCs that doesn’t matter any more.
Which is why Dell’s sales, and profits, began to fall several years ago. And even though Michael Dell returned to run the company 6 years ago, the downward direction did not change. At its “core” Dell has no ability to innovate, or create new products. It is like HTC – merely a company that sells and assembles, with all of its “focus” on cost/price. That’s why Samsung became the leader in Android smartphones and tablets, and why Dell never launched a Chrome tablet. Lacking any innovation capability, Dell relied on its suppliers to tell it what to build. And its suppliers, notably Microsoft and Intel, entirely missed the shift to mobile. Leaving Dell long on execution skills, but with nowhere to apply them.
Market watchers knew this. That’s why Dell’s stock took a long ride from its lofty value on the rapids of growth to the recent distinctly low value as it slipped into the whirlpool of failure.
Now Dell has a trumped up story that it needs to go public in order to convert itself from a PC maker into an IT services company selling cloud and mobile capabilities to small and mid-sized businesses. But Dell doesn’t need to go private to do this, which alone makes the story ring hollow. It’s going private because doing so allows Michael Dell to recapitalize the company with mountains of debt, then use internal cash to buy out his stock before the company completely fails wiping out a big chunk of his remaining fortune.
If you think adding debt to Dell will save it from the market shift, just look at how well that strategy worked for fixing Tribune Corporation. A Sam Zell led LBO took over the company claiming he had plans for a new future, as advertisers shifted away from newspapers. Bankruptcy came soon enough, employee pensions were wiped out, massive layoffs undertaken and 4 years of legal fighting followed to see if there was any plan that would keep the company afloat. Debt never fixes a failing company, and Dell knows that. Dell has no answer to changing market demand away from PCs.
Now the buzzards are circling. HP has been caught in a rush to destruction ever since CEO Fiorina decided to buy Compaq and gut the HP R&D in an effort to follow Dell’s wild revenue ride. Only massive cost cutting by the following CEO Hurd kept HP alive, wiping out any remnants of innovation. Now HP has a dismal future. But it hopes that as the PC market shrinks the elimination of one competitor, Dell, will give newest CEO Whitman more time to somehow find something HP can do besides follow Dell into bankruptcy court.
Watching as its execution-oriented ecosystem manufacturers are struggling, supplier Microsoft is pulling out its wallet to try and extend the timeline. Plundering its $85B war chest, Microsoft keeps adding features, with acquisitions such as Skype, that consume cash while offering no returns – or even strong reasons for people to stop the transition to tablets.
Additionally it keeps putting up money for companies that it hopes will build end-user products on its software, such as its $500M investment in Barnes & Noble‘s Nook and now putting $2B into Dell. $85B is a lot of money, but how much more will Microsoft have to spend to keep HP alive – or money losing Acer – or Lenovo? A billion here, a billion there and pretty soon it adds up to a lot of money! Not counting losses in its own entertainmnet and on-line divisions. The transition to mobile devices is permanent and Microsoft has arrived at the game incredibly late – and with products that simply cannot obtain better than mixed reviews.
The lesson to learn is that management, and investors, take a big risk when they focus on execution. Without innovation, organizations become reliant on vendors who may, or may not, stay ahead of market transitions. When an organization fails to be an innovator, someone who creates its own game changers, and instead tries to succeed by being the best at execution eventually market shifts will kill it. It is not a question of if, but when.
Being the world’s best PC maker is no better than being the world’s best maker of white bread (Hostess) or the world’s best maker of photographic film (Kodak) or the world’s best 5 and dime retailer (Woolworth’s) or the world’s best manufacturer of bicycles (Schwinn) or cold rolled steel (Bethlehem Steel.) Being able to execute – even execute really, really well – is not a long-term viable strategy. Eventually, innovation will create market shifts that will kill you.
(Adam hartung is the managing director at Spark Partners.)
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