Dell now private, problems remain

White board shown at Dell World 2012 illustrates company's thinking - photo Jim Wang

White board shown at Dell World 2012 illustrates company’s thinking – photo Jim Wang

After weeks of leaks Dell officially announced it is going private. The change removes the burden of reporting everything it does to the market. It gives Dell a chance to pull off its ambitious, complex restructure away from the spotlight.

In theory it should make the company nimble and able to negotiate big deals behind closed doors.

If going private works for Dell expect other high-profile technology companies to do the same.

Collapsing PC sales

Michael Dell built an empire selling PCs direct to customers cutting out the middleman – what IT business insiders call ‘the channel’. Dell built a business around operational excellence – the company’s technology wasn’t that innovative. It didn’t need to be. Microsoft and Intel did all the heavy lifting. That became a problem when Apple innovated its way to the top with smartphones and tablets.

Dell needs to change because its PC business is collapsing. While it isn’t the only computer maker crushed by the switch from traditional PCs, Dell has suffered more than anyone else.

Not only is the PC market in decline, Dell’s PC market share is falling. Until two years ago it was the world’s second largest PC maker. It is now third with a 10% global market share.

Dell’s PC era model worked

For years Dell’s business model worked, first marketing its products with print ads and then with an online store where buyers could customise hardware.

Dell expanded from PCs to servers, even printers. Today the company’s consumer PC business generates plenty of cash, but barely breaks even.

Now Dell wants to be a service-lead technology company offering software and integrating systems. It aims to look more like IBM or Cisco than a manufacturing business.

This probably means getting out of commodity markets like PCs. Such moves take time. They are risky – if customers get wind of moves to drop product lines they’ll go elsewhere. Going private means Dell can do this without spooking its customers.

Of course, if you’re a really savvy computer buyer, your plans will already take this into account.

Not plain sailing

Dell needs cash to fuel its transformation. It will need to buy business units. Money could be hard to find now the company is private. It will either need to take on more debt or fund acquisitions from cash flow. There may be problems buying smaller entrepreneurial firms without trading equity.

There’s also a question mark over Microsoft’s role after the software company helped finance the buyout with a $2 billion loan. It will certainly want something in return. Possibly Microsoft plans to use Dell to build its own hardware products. Which may influence how, when or even if Dell exits manufacturing.

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