Why Dell is Trying to Go Private

The Changing Face of Computing

The success of android, Apple's i-brand products and various other mobile computing devices has been a challenge for companies founded on the design and manufacture of traditional personal computers. Alongside this challenge, there is the pressure to compete not just with hardware, or software, but services provided by companies offering everything from outsourced analytics, to infrastructure architecture and management and IT solutions tailored to individual businesses. It’s now no longer enough to produce the machines - experts are required to run and optimize them, and some are even announcing the ‘death of the PC’ itself.

This trend is even more evident in small to medium businesses, where staff are usually not experts in things like data management or service provision through platforms based within, and are utilizing cloud-based computing technologies. Virtual Personal Assistants are a big thing at the moment, with reports claiming that hiring a VPN instead of a full-time staff member will immediately increase ROI simply for the time it saves more key figures in the business. VPNs also have technical knowledge that exceeds the expertise of many internal staff and usually have a masters in cyber security. Likewise, VoIP service providers have teams who provide Enterprise Solutions and Services (ESS) for marketing strategies, business analytics, customer service and general communications.

Enterprise Solutions and Services

The privatization offer was announced on the 5th of February this year, but plans have been in progress since August last year, when Michael Dell realized that his company was in a precarious position. The market is increasingly moving towards service provision as its primary revenue stream, and while Dell’s ESS department continues to grow, it has lost much of the revenue it used to generate through storage services to cloud-based solutions.

What Dell needs to do now, Michael Dell said in a recent shareholder presentation, was focus on cementing its position as a market leader through enhancing those ESS products. This will involve job re-structuring, job losses, and the need for hefty capital investment. By going private, Dell will avoid being scrutinized by the prying eyes of Wall Street, as well as avoid encumbering itself with large debts that both make it answerable to investing parties and diminish the company's ability to weather expected economic shortfalls during the transition.

While Dell’s reputation and capacity for producing quality personal computing hardware is secure, the transition to a radically different area of operations is likely to be fraught with uncertainty. The greater autonomy and flexibility afforded by going private is a necessary step to ensure it can keep pace with the market, and perform the restructuring necessary to be a contender in a highly competitive field. The proposed $24.4 billion buyout, however, has caused concern for shareholders, and many are not willing to entertain the $13.65 per share that this would entail.

Troubled Waters

The shareholder vote on going private was delayed by two weeks, taking place on July 24^th, due to Dell’s fear that the majority rule would be overturned by the number of shareholders who won’t vote. A non-vote counts as a vote against, and the uncertainty of Dell’s position has been causing many potential voters to get cold feet. Dell increased its proposed share price by 10 cents, to $13.75, and on Friday included a special dividend of 13 cents per share which raises the value of the buyout to $25 billion. In exchange the special committee agreed that abstentions no longer count as opposing votes. In a regulatory filing, Michael Dell reported that he expects shares to fall to an unprecedented $7.90 if the privatization offer is not accepted.

Michael Dell has attempted to and received some change to the voting regulations to take account of this, with the result that Carl Icahn, a key investor who owns 13 per cent of the company, filed a lawsuit against the company on the 1^st of August. Alongside general shareholder uncertainty, several of Dell’s biggest investors have been vocal about their opposition to the buyout, and Icahn is not the first to take this position. Investor Catherine Christner had previously filed a similar suit with Delaware Chancery Court. Both investors feel that going private would diminish the value of the company, and effectively result in selling products for less than they’re worth.

The future of Dell remains uncertain.