Infotech 101, the course that all CEOs of tech companies should have taken freshman year, says that if you start fiddling with your corporate structure in public, you’ll spook your customers and lose business.
It might not have been so. If Michael Dell had managed a clean leveraged buyout, maybe the rumbling in the customer ranks wouldn’t have started, but now that it’s open season on Dell (the company), competitors are lining up to harvest Dell’s customers in their season of discontent.
With both Carl Icahn and Blackstone Group leading separate efforts to outbid the Dell internal group (Michael Dell and Silver Lake Partners aided by Microsoft), Dell stands a chance of losing his job — exactly the opposite of his intention when he set out on the journey to take the company private.
Over the past few years, as Dell has acquired companies for its enterprise solutions business, it has taken on debt that is comparatively massive for a tech company. Remember, this is the industry that was financed on cash, and many of the founding companies still have lots of it (the problem of repatriation of foreign profit notwithstanding).
Microsoft, for example, has nearly $90 billion in current assets and about $32 billion in current liabilities, yielding a current ratio of 2.8. Cisco has more than $60 billion in current assets against around $18 billion in current liabilities, for a ratio of 3.3. In most industries, these are enviable numbers.
Dell, on the other hand is showing almost $28 billion in current assets and more than $23 billion in current liabilities as of the Jan. 31, 2013 quarter, for a ratio of 1.2. Not huge, but at least it’s above 1.
For comparison, HP has around $50 billion in current assets as of Jan. 31, 2013 and about $44 billion of current liabilities, giving it a ratio of 1.1, pretty much in Dell’s ballpark. (HP points out, rightly, that its ratio would be much higher if its "good debt" — financial services loans, which are based on contractual cash flows from customers — were separated from its "bad debt," the operating obligations, which the company is reducing as quickly as possible. )
As Shira Ovide points out in this morning’s Wall Street Journal story (cited above), even if the internal group led by Michael Dell prevails, it may have to raise its bid, stretching the company’s balance sheet even more, since a lot of the purchase price would come in the form of new debt. All this debt raises the company’s financial risk and the market’s perception that Dell is a riskier investment.
But these details are not really the problem here. It’s uncertainty, that enemy of customer confidence.
In all the years that I’ve been following Dell, HP, and IBM, whenever one weakens in any way — however ephemeral, illusory, or slight — the other two pile on as fast as possible in the field, directing sales people to stir up the FUD (fear, uncertainty, and doubt) in order to woo away as many of the beleaguered company’s customers as possible. This is a time-honored tradition in our industry, and, I might add, one that Dell itself has practiced with great zeal in the past.
During HP’s rocky time of management changes and policy reversals, Dell and IBM made as much hay as they could. Now, HP is looking stable-ish and its customers have begun to calm down. No doubt, HP is heartened by Oracle’s recent travails and earnings stumble.
It should be clear to all by now, though, that any stability could be temporary, and it’s best to remain circumspect. (With respect to stability, IBM deserves a shout-out. The company has not experienced the kind of turmoil recently that the other two have faced.)
Along the Dell-HP axis, though, the shoe is now firmly on the other foot, and Dell — as HP did in the past — finds itself fending off the flingers of FUD.
Disclosure: Endpoint has consulting relationships with Dell, HP, and IBM. This post was amended 3/26/2013 to include the parenthetic on HP's debt. A further update added the word "recently" to the penultimate paragraph.
Twitter: RogerKay
