Why Dell's private future will mirror its public present
It's official: Dell (the man) is taking Dell (the company) private once again, with the help of a significant investment by the Silver Lake investment group and a $2 billion—with a "B"—loan from Microsoft. Aside from bankers, though, who cares about the financial details? Titanic events aren't titanic because of the nuts and bolts. It's their impact that's earth-shaking.
This morning, I spoke to several analysts to get a feel for what Dell's privatization could mean for me, you, and the PC ecosystem as a whole. Hint: Microsoft's involvement isn't as portentous as it seems at first glance.
Why go private? It's the cost of doing business
Simply put, Dell's in the midst of a complex restructuring, realigning its focus to become more of a full-featured, enterprise-oriented company—think IBM if IBM hadn't sold off its PC business. The wisdom of that transition won't be fully known for years to come, but in the short term, Dell isn't likely to generate the constantly increasing profits demanded by public stockholders. So the company's going private.
"Dell wants the opportunity to finish its 'remake' without being bothered by the public markets," Stephen Baker, NPD's vice president of industry analysis, told PCWorld. "The market won't let go of the fact that it sees sales declines in PCs. Dell has to go back and build out its enterprise, cloud, and software services, and that's going to take some time and money. In the short term, that [restructuring] is not going to turn the overall trend of the company around, and it's kind of tough to do all that with the Wall Street guys breathing down your neck."
Once the privatization is approved and Dell manages to shrug off the oh-so-demanding public, Rob Enderle—founder and principal analyst at the Enderle Group—expects the company to undergo some major restructuring and "possibly do something very unique, like buy a services company."
Dell will no doubt need to make some acquisitions as part of its ongoing remake, and it would've been difficult to do so while simultaneously satisfying the whims of Wall Street. Then again, Dell's privatization deal loads it up with debt and takes away the freedom of public equity, so the company will have to proceed very cautiously before pulling the trigger on a merger. It simply can't afford a debacle similar to HP's purchase of Autonomy .
Wait, will Dell stop making consumer PCs?
Dell may be going private to gain speed and flexibility in its enterprise transition, but that doesn't mean the company's pulling an IBM and throwing in the towel when it comes to traditional PCs. None of the analysts I spoke to felt as though Dell is poised to exit the consumer PC market.
"I think the Microsoft investment would incent Dell to stay in the consumer business," Patrick Moorhead, founder and principal analyst at Moor Insights and Strategy, told PCWorld.
"They certainly aren't going to get out of the PC market," says NPD's Baker. "PC market clients are a pretty important part of Dell's overall relationship with their customers, and the volumes you get in the PC market are pretty strong. There's an awful lot of overlap between consumers and small businesses, and that's a position that any kind of company in Dell's position needs to be in."
Dell's product lineup is already adjusting to target a higher-end customer. Part of the reason Dell's shipment volumes have slumped in recent quarters is due to its shift away from the commodity PCs the company is so famous for. Instead, Dell has doubled down on more premium PCs, including several Ultrabook models and its XPS lineup. The company also owns Alienware, a well-known gaming machine brand.
Moorhead thinks Microsoft's involvement could lead to a resurgence in Dell's more modestly priced consumer offerings, however. "If anything, it could incent them to be more aggressive price-wise, like the old Dell used to be."
Microsoft's role: Much ado about nothing?
That said, while Microsoft's $2 billion investment may give it a bit of sway over Dell, don't expect the loan to lead to Microsoft imposing its will on the newly privatized company.
"Michael [Dell] would not have struck a deal with Microsoft that puts Dell in a worse position," says Moorhead. "I think the loan gives Microsoft an advantage as far as influencing Dell, but I don't think Microsoft would do anything that would be bad in the long-term for the company."
In fact, most analysts think that Microsoft's loan is more of an investment in the overall PC ecosystem rather than a specific investment in Dell, which jibes with Microsoft's official statement: Microsoft is committed to the long term success of the entire PC ecosystem and invests heavily in a variety of ways to build that ecosystem for the future .
"I think it's similar to other investments Microsoft has made in Nokia and Nook," Baker says. "Microsoft wants a strong ecosystem around the Windows world, whether it's consumer or enterprise. They know they can't do everything themselves."
"Microsoft certainly doesn't want what has traditionally been the number two PC player to lose momentum," IDC's David Daoud told PCWorld. "Certainly, Dell has some enormous relationships with some very large [enterprise] accounts, and it's critical to keep those going and mature."
Microsoft's investment in Dell shouldn't be a detriment to competing Windows manufacturers; Redmond also invested billions in Nokia to bail it out of hot water and keep it operational as a Windows Phone OEM, but that investment hasn't led to Microsoft giving other Windows Phone partners the cold shoulder.
What about the Surface line-up?
Ah, here's where things have gotten muddled. Ever since rumors of Microsoft's involvement in Dell's privatization where first whispered in the back alleys of the Internet, those whispers have postulated that Microsoft might use its newfound leverage to further its Surface hardware initiative in some way. Some rumors speculated that Microsoft might fob off Surface production on Dell entirely! Hogwash, the analysts say.
"No," Baker says flatly. "I don't think there's any chance of Microsoft turning Surface or anything about the Surface over to Dell. In the end, this is something Microsoft feels it needs to do under its own brand. Surface isn't just a device, it's also an understanding of consumer preferences, and how end users want their hardware to interact with their software.
"For Microsoft, having a direct play on that is much more important than the volume sales or how much money Surface makes. I really can't see them handing this to Dell."
The other analysts feel that in the short-term, Microsoft may use Dell's deep supplier connections to streamline production of the Surface line. In the long term, a stronger Dell could lead to the end of the Surface brand entirely, Moorhead says.
"If Microsoft believes that some of the best upcoming Windows tablets and notebooks are based from Dell, then there's no reason for Microsoft to be in that market," he says.
The bottom line
If that Surface-ditching scenario ever happens, it would likely be years down the line—matching the timeline of the other goals in Dell's ongoing remake.That focus on long-term strategy over short-term gains is exactly why the company has decided to go private.
All-in-all, the company's newly private status likely won't change much for everyday users in the short term. Dell will continue making computers and restructuring the company to focus more heavily on the enterprise market, just as it has been doing for the past several years. That reality may not be "sexy," but it is a huge deal for Dell and the Windows ecosystem alike—and the substantial investments of Silver Lake, Microsoft, and Michael Dell himself guarantee that future will occur, Wall Street whims be damned.