What struck me then was the degree to which, in this century, a company could redo its entire top management team and not have a single woman on it. Women start more than half the small businesses in the U.S. and thus create the most new jobs. For sure if Facebook’s Sheryl Sandberg and Yahoo’s Marrisa Mayer are any indication, finding really outstanding women who bring something new to the table in the technology business is not hard to do. So far, Meg Whitman has been flailing at Hewlett Packard but she sure led EBay successfully for a number of years. I reminded Michael Dell at that meeting of their previously successful ad campaign about “Dude, You’re Getting’ a Dell.” I suggested it was inverted and that “if you bought Dell, you were really getting a Dude.”
A number of years ago, Advanced Micro Devices brought a series of actions against Intel which it accused of engaging in anti-competitive behavior. In retrospect, that was a key turning point for Dell. As the case was resolved, we learned that over a period of years, Intel paid Dell $4.3 billion from 2002-2006 to feature “Intel Inside” its computers to the exclusion of AMD’s chips. To settle the litigation, Intel paid AMD $1.25 billion. In the course of that suit it was revealed that for years Dell reported earnings that largely were an accounting misrepresentation. Much of their profits came from the Intel subsidies and not from running their business. The Economist called it “a huge financial illusion.” The SEC described it as that Dell had “manipulated its accounting over an extended period to project financial results that the company wished it had achieved.” Without those funds, the SEC contended that Dell would have missed its earnings projections in every quarter for about five years and that in one quarter the Intel payments represented more than 75% of reported results. Of course, with the SEC, you can be sure there was a “No Lo” in which Dell paid a meager $100 million fine but neither admitted nor denied it had done anything wrong. Mr. Dell individually also was fined with a "No Lo" that wasn't even petty cash for the billionaire. The fines were tiny in comparison to the offense.
Undoubtedly, Dell was never more than an “assembler” of other companies’ goods and software. Initially its claim to fame was that it was a low cost provider. It also carried no inventory and had no “supply lines” to support between it and retail stores. You paid cash up front, they built your machine and then they shipped it to you in a highly efficient manner. They didn’t even pay their component providers for about 58 days so they also got to earn interest on your cash payment in that two month interim when interest rates were high enough for that to be an important income stream. In one iteration of top management, Dell redefined itself away from the consumer into a provider to large enterprises including corporate America and the U.S. Government. The early image of offering the best price was no longer true but few noticed.
Unlike Hewlett Packard which was a highly inventive company with a long history of great technology, Dell was not successful when it decided to try its hand at designing new devices such as phones or tablets or anything cutting edge. Invention was never part of its culture and it didn’t succeed when it tried that avenue. Hewlett made the bulk of its money selling printers until recent years when that business has become highly competitive and since it bought Compaq and became Dell's major U.S. competitor.
After cleaning up its accounting scandals, Dell next decided to enter other businesses like providing turnkey software packages to major corporations, copying the approach of major tech firms like IBM, by buying Perot systems. It should be noted that IBM exited the PC business years ago when it sold off its product line to Lenovo. More recently, Dell has tried a variety of acquisitions to provide new revenue streams. However, the key player tasked with that activity, S.V.P. for Corporate Strategy David Johnson, has just left Dell this month to join Blackstone signaling a dead end for that pursuit.
What exactly does Dell have to sell? It appears to no longer be a growth business as users move to smaller computing formats in which Dell is not competitive. We also now know that without it’s Sugar Daddy Intel smoothing out the bottom line, they haven’t done particularly well. Perhaps we should look at Dell as one looks at an old industrial company that generates cash, or a motion picture company with a good library. You can calculate a stream of earnings off the asset, apply an assumed discount rate and determine a present value for the assets. Some financial buyers could simply regard it as a wasting asset that can be used as a cash cow to fund other activities. At a time when interest rates are the lowest in decades, it may even pay to buy Dell just to generate a better return than you can get on a thirty year Treasury bond. As another strategy, to reclaim some of the purchase price, a buyer could also turn around and resell some of the companies with known brand names that Dell has acquired in recent years.
As talk heats up of a “going private” transaction, some brokerages are suggesting that Dell is worth between $13-15 per share. That’s a far cry from prices in the 50’s at which Dell sold at the height of the Tech Bubble in 2000. It also isn't much higher than the $13+ price to which the stock surged in recent days. While Dell has about $11 billion in cash on hand, it also has about $5 billion in debt. Without a takeover, it will probably sink back to the lower prices at which it has recently been trading.
Joan E. Lappin CFA Gramercy Capital Mgt. Corp.
We have no investment interest in Dell at this time. I did recently purchase a Dell workstation fully loaded on a 30% off sale after Hurricane Sandy fried my old one in a power surge. I took that deep discount as a harbinger that the current quarter wasn’t too strong.
To contact our firm: info@gramercycapital.com Follow Joan on twitter: @joanlappin.
