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It’s Official – Dell is Going Private… Now what?

If you haven’t heard by now, it’s official.  Yesterday, Dell (NASDAQ:DELL) reached an agreement to sell itself into private ownership in a $24.4 billion leveraged buyout, the largest since the current recession began in 2007.  The transaction will be led by capital and equity contributions from company founder and current Chairman and CEO Michael Dell along with a $2 billion loan from Microsoft, investment from private equity firm Silver Lake Partners, debt financing by various financial giants, and cash on hand.  Shareholders will be offered a share price of $13.65, which was 25% higher than Dell’s stock price last month, but now that the announcement has been made that premium has shrunk to just under 2% of the current trading price.

How did Dell get here?

I guess Michael Dell was a better PC manufacturer than grammarian…

Michael Dell first founded “PC’s Limited” in his University of Texas at Austin dorm room in 1984.  It grew quickly and grossed $73 million in its first full year of operation, earning Dell the honor of being the youngest ever CEO of a Fortune 500 company.  The company continued to grow and Dell began to offer online ordering of its PCs in 1996.  At the same time, Dell’s notoriety as Consumer Reports’ most reliable PC helped it become the world’s largest PC manufacturer by 1999.

Attempting to expand into the growing consumer electronics market, Dell started producing devices such as MP3 players and TVs in 2002.  Unfortunately, it had difficulty keeping up with its competition without a retail storefront where consumers could test drive the products.  Despite never gaining traction with retail electronics, Dell remained the world’s top PC manufacturer from 2003 to 2006, but has failed to innovate or to remain competitive and as a result has been steadily losing market share ever since.

Now what?

So what’s next for Dell?  Egon Durban, Managing Partner at Silver Lake, said “

[they’re] looking forward to partnering with [Michael Dell and accelerating] the company’s transformation strategy to become an integrated and diversified global IT solutions provider.”  That sounds a lot to me like their goal is to build a global consulting organization like HP, IBM, or Accenture, but I’m sure Durban gave a purposefully encouraging yet nebulous answer.  Let’s take a look at some of Dell’s recent acquisitions to see if we can draw some hints about their potential plans:
  • ACS (2006) – Applications management and deployment.  At the time of purchase, it was said that Dell hoped to leverage ACS to help its clients deploy Windows Vista.
  • Silverback (2007) – Produces software that monitors and manages “thousands of Windows PCs and servers.”  Sensing a theme here?
  • EqualLogic (2008) – Large player in the Storage Area Networking (SAN) space.  Combined with virtualization software like VMWare, SANs and robust data center networking are the three primary building blocks for today’s cloud architectures.
  • Sonicwall (2012) – While I can’t consider them a serious competitor to Cisco or Juniper, SonicWall boasted a fairly extensive portfolio of network security and threat management appliances before its acquisition.
  • Wyse (2012) – The global leader in thin client technology.  With more and more of a company’s IT “horsepower” being consolidated into the Data Center, thin clients and virtual desktops will only become more popular.

Sure, some of the earlier acquisitions were PC-based, but if you look at the full list of Dell’s acquisitions most of the recent purchases are somehow related to the Data Center, and what happens in the Data Center?  Virtualization, cloud computing, and all the other amazing things that are really contrary to Dell’s legacy of selling low-cost, high-volume desktops. I think Christopher Mims saw the writing on the wall:

A privately held Dell, shielded from the pressure to post continual growth on a quarterly basis, could refocus itself on thin clients and cloud computing, which could set itself up for a breathtaking turnaround.

Dell has all the technology components they need to become a major player in the data center / virtualization / cloud space, but in order to do so they’d very nearly have to turn their backs on twenty years of desktop PC business and start focusing on development of best-in-class data center solutions to go head-to-head against incumbent giants such as HP, IBM, Cisco, NetApp, and EMC.  If anyone can do that for Dell, it would certainly have to be Michael Dell.

What do you think?  Can Dell can get his company a solid foothold in the Data Center and cloud space?  Let us know in the comments.


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