Will Dell’s Results Further Founder’s Takeover Agenda?
The severity of the shrinking personal computer market was on full display in Dell’s (NASDAQ:DELL) first quarter results. The PC manufacturer reported Thursday that profit dropped 79 percent from the year-ago quarter and revenue dropped to $14.1 billion, slightly above analysts’ expectations for $13.5 billion.
That Dell’s situation grew worse during the first three months of the year will come as no surprise to the industry. Nevertheless, the results will give a new perspective for the company’s founder and Chief Executive Officer Michael Dell, and activist investor Carl Icahn in their separate attempts to buy out the company. Ever since rumors began circulating that Mr. Dell was preparing an offer to take the company private, the main question that has guided the analysis of shareholders, industry experts, and the company’s board is how much should the company be valued, given the condition of Dell’s key market. The first quarter’s disappointing results gave some additional perspective and weight to Mr. Dell’s effort.
“Hardware margins were pretty abysmal, which should generally support (Michael) Dell’s bid,” Morningstar analyst Carr Lanphier told Reuters. “But Michael Dell’s strategy is also to be aggressive in pricing, to win key contracts.” Still, “it doesn’t seal the case one way or the other.”
Mr. Dell, who began the company from his college dorm room, submitted a proposal with the private-equity company Silver Lake to take the PC maker private for $24.4 billion, or $13.65 per share. He argued that the process of transitioning the company into a provider of enterprise computing services would be best done away from public scrutiny. Dell’s board accepted the offer, but due to Mr. Dell’s insider status, a special committee of the company’s board implemented a 45-day go-shop period where other offers could be solicited, so as to avoid giving the appearance of a conflict of interest. Still, many shareholders, most notably Southeastern Asset management, argued that the offer significantly undervalued the company. Southeastern said earlier this year that Dell should be valued closer to $20 per share.
During the go-shop period, Dell received bids from both Blackstone Group and Carl Icahn, but Blackstone withdrew its bid after research firms IDC and Gartner reported that PC sales had contracted sharply in the first quarter. The firm cited an “unprecedented” decline in the company’s PC sales, along with its “rapidly eroding financial profile” as the cause of its departure. Carl Icahn, whose joint offer with Southeastern would give Dell shareholders the option to keep holding stock and take an additional $12 a share in cash or stock, still has his proposal on the table.
Both Icahn and Southeastern have said the Mr. Dell’s buyout bid is too cheap for a company attempting to become a major provider of enterprise computing. The company’s results did reflect that shift in focus. Dell reported that revenue from enterprise solutions, services, and software rose 12 percent to $5.5 billion, while overall revenue fell 2 percent and its “end-user computing division,” which includes PC sales, slid 9 percent. In order to grow its enterprise business so that it can compete with more established players like International Business Machines (NYSE:IBM) and Hewlett-Packard (NYSE:HPQ), Dell has invested heavily on research and sales.
The battle between Icahn and Mr. Dell regarding Dell’s future emphasizes the uncertainty in the PC industry, which was sent in a downward rival thanks to the growth of the smartphone and tablet markets.
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