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Dell's Bold Plan

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January 23, 2013 – Comments (0) | RELATED TICKERS: DELL , MSFT

Board: Dell, Inc.

Author: TMFinept

Disclosure 1: I work at Dell but I have zero insight into this deal or whether it's even in discussion. I know nothing. I can only offer my own opinions based on public knowledge of Dell's ongoing transformation strategy through the lens of an investor.

Disclosure 2: I own shares of Dell.

I would also guess that "trying to steal the company" is substantially the idea.

Dell is in the middle of a complete transformation of its business model. That transformation, which is being financed by the declining but cash-generating PC business and debt, is taking longer than expected and costing more than expected. This combined with a secular decline in the PC business has shares trading at extremely low valuations.

The transformation is working out well so far, actually, and Dell is really making inroads into the IT infrastructure and software businesses that it's aiming for. This business is growing robustly and offers reasonable margins, but the scrutiny from analysts and shareholders is difficult to reconcile with these results and with the plan in general. What analysts want and expect is markedly different from what Dell has explicitly stated it's aiming to do. The punishment laid out on the company as a consequence is damaging.

The plan is bold, to be sure. It's a huge change for Dell and it's exchanging one competitive industry for another. It's reasonable to discount this and question its viability, but the analysis from Wall St. ignores it entirely, as if Dell's revenues were 100% consumer PC when that's actually only ~20% of the business these days. In the consideration of the analysts and most shareholders, Dell is a consumer PC company that's falling behind in a growing mobile market and that's all it is and will ever be. I challenge you to find an article on Dell that doesn't devote the substance of discussion to flagging consumer PC sales and a lack of presence in mobile. That's crazy because mobile is a market that Dell has substantially abandoned and actually has little interest in from a consumer electronics perspective anymore. Analysts don't get it, even though Dell has stated its intentions quite explicitly.

Maybe it's better to just disconnect from all that for a while?

I think Dell is substantially undervalued assuming that its transformation goes according to plan and that 5 years out, we could be looking at a company that is worth 2x what it is today. There's a great deal of money to be made by partners in this supposed deal and being private lets Dell execute on its strategy without public scrutiny.

If Michael Dell is using his own money to partially finance this deal and intends to helm the company though its transformation, I think things could go very well for the supposed buyout partners indeed. Michael Dell is more of a visionary than people give him credit for and he's an effective leader with high business acumen. I get the impression that he knows where he's steering this old ship.

My guess is that the intentions in a potential buyout of this nature are:

- Capture and lock away the unrealized value in Dell
- Steer the company through its major transition
- Potentially spin off legacy business assets (e.g. Consumer PC) when the transformation is done or nearly done
- Take the company public again 5-10 years down the road
- Light cigars with hundred dollar bills

As a Dell shareholder, this makes me sad. I want to profit too. I see the logic here and I think it's sound. I'd hate to be cut out of the bulk of the profit that I was expecting, but having purchased at low prices I wouldn't be terribly upset about a solid buyout offer either. As a Dell employee in the services side of the business, I guess I would profit from the company's improved fortunes anyway.

If Michael Dell can round up the cash to make this happen with himself in charge, I think he's going to get a great deal richer.

inept 

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