Dell’s ‘Reshaping’ of PC Maker Means Chasing Services (Update2)
By Connie Guglielmo
Oct. 15 (Bloomberg) -- When Salesforce.com Inc. Chief Executive Officer Marc Benioff wanted ideas about how to run his business during the technology recession of 2001, he turned to his friend Michael Dell.
Dell’s advice: “Economic difficulties are a time when companies can reassess where they are in the market and rebuild themselves rapidly,” says Benioff, who has known Dell Inc.’s founder and CEO for 20 years.
Now Dell is trying to follow his own advice. Since returning as CEO of his namesake personal-computer company in January 2007, Dell, 44, has made 10 acquisitions, cut more than 10,000 jobs, outsourced 40 percent of production and entered the smart-phone market in China. The goal, Dell says, is to diversify beyond PCs, which he started selling from his University of Texas dorm room in 1984 at the age of 19.
“You’re starting to see a real reshaping of the Dell portfolio and Dell business away from some things that were pretty important for us in our first 25 years,” Dell said in an interview this week. “We’re doing some new things that will be more important for our next 25 years. We’re making progress.”
To reduce its reliance on PCs, which account for more than half of revenue, Dell has expanded into markets such as computer storage and services and announced the $3.9 billion buyout of Perot Systems Corp. last month. Dell said in the interview that he will consider more acquisitions or partnerships that expand the company’s sales to health-care companies, which account for more than half of Perot’s revenue.
Investor Concerns
The pace of the overhaul, though, has left some investors and analysts unimpressed. The Round Rock, Texas-based company’s shares have lost 35 percent since Dell ousted his handpicked successor, Kevin Rollins. During that time, Armonk, New York- based International Business Machines Corp. has jumped 29 percent and Palo Alto, California-based Hewlett-Packard Co. gained 11 percent.
PCs represented about 60 percent of sales at Dell for the past three years, down from almost 80 percent in 2000. Services accounted for 10 percent of sales last year. Dell dropped to third place from second in the global PC market last quarter, Framingham, Massachusetts-based researcher IDC said yesterday.
At Hewlett-Packard, which retook the PC lead from Dell in 2006 and has worked to expand its software and services business, PCs account for about one-third of sales.
“The best thing that Michael Dell can do is take PCs off the table and diversify,” said Ben Reitzes, an analyst with Barclays Capital in New York. “He’s starting to do that, but he’s late.”
Dell fell 20 cents to $15.43 at 4 p.m. New York time in Nasdaq Stock Market trading. The stock has gained 51 percent this year. It declined in each of the past four years. Of the 33 analysts who cover the company, 14 recommend buying the stock, 18 say hold and one says sell.
‘Why Not Faster?’
Dell has a “high degree of impatience and intolerance” for a lack of action, says Don Carty, chairman of Virgin America airline and a Dell director since 1992. “He is always the executive on the team that says, ‘Why not faster?’”
When asked at an event in California this week where the company stands in its turnaround efforts, Dell said, “somewhere in the middle. We’ve made a lot of progress.”
Carty says Dell’s hasn’t been too slow. Investors may have unrealistic expectations about how long it takes to turn around a business with more than $60 billion in annual sales.
‘Big, Complex Organization’
“There becomes an expectation when someone comes back to run the company that within a quarter the results are going to change,” Carty says. “This is a big, complex organization today and change takes time. Michael is not focused on quarter- to-quarter earnings.”
When Dell returned as CEO after a three-year hiatus, a time when he held the position of chairman, he spoke with the board and executives and about his excitement and the challenges he faced in remaking the company.
“He said, ‘All you people care about this company, but I’m going to care about this company when I’m dead,’” Carty says. “I think there’s some truth to that.”
In August, Dell reported second-quarter profit and sales that beat analysts’ estimates after cutting manufacturing costs and attracting buyers with low-priced notebooks. This quarter, analysts predict sales will drop 14 percent to $13.1 billion and start to rebound by the end of Dell’s fiscal year in January.
When asked to rate the pace of change at the company, Dell says the economy has been the biggest stumbling block, something he refers to as “an interesting little challenge.”
“I always want to go faster,” Dell says. “I’ve been known to have a fair dose of impatience.”
Longtime Friends
Still, he can be patient when the situation calls for it. Dell first approached the Perots, who are longtime family friends, two years ago about buying the computer-services provider. Perot Systems, founded by H. Ross Perot, wasn’t interested in selling at the time, according to regulatory filings.
After considering other computer-services providers, Dell returned to Perot Systems in April and offered $17 to $19 a share for the Plano, Texas-based company, according to filings. When that offer was rejected, Dell raised its bid three more times -- settling on a cash deal that, at $30 a share, represents a 68 percent premium.
Dell’s takeover of Perot “made sense to me,” Azim Premji, CEO of Wipro Ltd., India’s third-largest software services provider, said in an interview yesterday. Perot “is a very good company. They have a base which I think is useful.”
Perot Premium
When asked why he didn’t do a services deal sooner, Dell said “we either weren’t ready or it wasn’t the right time for a variety of reasons,” declining to elaborate. Asked about what caused Dell to go from bidding $17 to $30 a share over of five months of talks, he said: “This is what you’d call a negotiation.”
The deal was mediated in part by Thomas Luce III, a Dell board member since 1991 and a friend and adviser to Perot and his son, Ross Perot Jr., chairman of Perot Systems.
“It’s not surprising that Michael and Ross Jr. did a deal,” Luce said in an interview. “They’re pretty big names in Texas, and both have a lot of energy and drive.”
Perot Jr., who will join Dell’s board when the purchase is complete, said he met Dell in 1988 when he tried to sell him 300 acres of land for a campus in Austin, Texas. “Nothing ever happened, but I was able to walk in and introduce myself,” Perot Jr. said in an interview. “Michael’s very focused on work -- his love and passion is building Dell.”
Profitable PCs
As for PCs, Dell says he’s looking to a new version of Microsoft Corp.’s Windows to buoy sales, at first to consumers. Businesses, which account for 78 percent of Dell’s revenue, may be slower to test and implement the new operating system, though Dell said there will be a major upgrade cycle for technology at some point in 2010.
Dell says he’s focused on profit in the PC market, even if that means losing its No. 2 market ranking behind Hewlett- Packard. “What we want to be is leading in profit share,” Dell said. “Do we want to sell the most numbers of units? No, we want to have the most profit.”
Dell’s overall operating margin, or operating income as a percentage of revenue, was 5.22 percent in the last fiscal year, compared with IBM’s 15.4 percent, Hewlett-Packard’s 9.1 percent and 19.3 percent at Apple Inc., maker of the Mac and iPhone.
Instead of a “PC maker,” Dell says he considers his company “a solutions integrator.”
Carty says Michael Dell’s greatest strength is his ability to listen, to consider the opinion of others before making a final call. “It’s just his nature to be very thoughtful.”
Benioff describes Dell as one of the hardest-working executives he knows.
“You send him e-mail, you get a response a minute later. He’s constantly online, he’s constantly working, he’s constantly in touch,” Benioff says. “He’s not afraid to get out there and be with the customers.”
To contact the reporter on this story: Connie Guglielmo in San Francisco at cguglielmo1@bloomberg.net.
Last Updated: October 15, 2009 16:26 EDT |
