In a rational world, Michael Dell would have no reason to take his company private. Investors should prefer a strategy that works in the long run, and if a decision hurts quarterly sales or profits, they'd shrug it off.
But no matter how much drivel you hear about the wisdom of the markets, the stock market is not rational. Too many investors are locked in to a short-term outlook that fixates on "making the numbers" every three months, which hinders the radical actions needed to mount a turnaround. That's why Dell's reported plan to pull his company out of the Wall Street circus makes sense. But it's not the solution to Dell's problems.
Dell's problems run very deep, so getting Wall Street off management's back alone won't solve them. Going private won't break the company's dependence on the fading market for PCs. Going private won't suddenly earn a return on the billions of dollars the company has poured into buying software companies. What's more, going private won't fill the black hole that is Dell's mobile strategy.
Taking Dell private is a necessary but hardly sufficient condition. Dell needs radical surgery -- and it won't be pretty. The company must redeploy its resources, which means thousands of people who work there and in its supply chain will lose their jobs.
Dell needs to break its chain to the PC
Dell was one of the first companies I covered when I started my career as a business writer in the early 1990s. I visited the outfit back when its headquarters was still in Austin, and I well remember my surprise when I asked a top executive about how much the company spends on R&D: Basically nothing, he told me.
That wasn't exactly true; Dell has always spent money on product development. But when it comes to research, you'd be hard-pressed to find a spare dollar at Dell. That hasn't changed since my visits to Dell 20 years ago.
That no-research strategy made sense when the company was all about PCs. Founder and still-CEO Michael Dell understood that lightning-fast, cost-efficient manufacturing of standardized products, coupled with an iron grip on the supply chain, was the route to success. It worked. Dell was the right company for the PC-centric world of the 1990s and 2000s, but not for the the 2010s' mobile-centric world of tablets, smartphones, the cloud, and BYOD.
Michael Dell knows that of course, and he is struggling to reshape the company he started out of his college dorm room. Faced with the steady decline in the PC market -- in the third quarter, worldwide shipments of PCs plunged more than 8 percent from a year earlier, while Dell's shipments fell 14 percent, according to IDC -- he's rightly pushed to lessen the company's dependence on it.
Just a few years ago, roughly three-quarters of Dell's revenue came from the sale of PCs. Now it's about 50 percent, a real improvement in terms of making Dell less dependent on that diminished product category -- but it's still far too high. Dell knows that, which is why it has spent billions of dollars acquiring a bevy of companies in software, storage, and networking.
However, the results of all those acquisitions have been far from stellar. Revenues in each of Dell's other product categories declined from a year ago. Sales for storage products dropped 16 percent, software and accessories fell 11 percent, and services were down 1 percent. Sales were off across all of its customer segments as well. There was one exception in that sea of decline: Dell's server and networking business grew 11 percent over the last full quarter.
I wouldn't say Michael Dell is in the panic mode, but it's no surprise that he's floated the idea of going private.