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Technology Stocks : Dell Technologies Inc.

DELL 122.55

+4.4%

Nov 21 3:59 PM EST

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To: Jim Patterson who wrote (36594)	4/3/1998 5:14:00 PM
From: Meathead	Read Replies (3) of 176387

Jim, 2B in cash can go a long way. The ficticious battle you describe would destroy the PC industry from top to bottom. Thats what it would take to put Dell out of business and that's why it will never happen. You forget, IBM, HWP and CPQ compete as much with each other as they do with Dell so don't expect them to "get together" and burn their own house down. Here is an simple example using 1st grade math. Cpq cash Cpq Dell cnsmptn ratio Box Net Box Net 2000 140 1800 126 1900 40 1800 126 1800 -60 1800 126 1700 -160 1700 26 1600 -260 1600 -74 3.5x 1500 -360 1500 -174 2.0x 1400 -460 1400 -274 1.7x 1300 -560 1300 -374 1.5x 1200 -660 1200% -474 1.4x Suppose Dell has a 10% cost advantage over CPQ (which they do). Suppose both companies have a net margin of 7% (which is close) If you take a $2000 box, CPQ makes 140 while Dell can sell the same box for 1800 and make 126. At price parity, CPQ goes negative while Dell still makes 126. A sustained price war to drive Dell into negative territory would have CPQ consuming cash at 3.5 times the rate of Dell. With CPQ selling twice as many boxes as Dell (which they do), CPQ would lose $7 for every $1 Dell lost (remember, CPQ has roughly only 3.5x the amount of cash Dell does). With Dell selling 1M systems/qtr and CPQ selling 2M, Dell would run out of money in 16 quarters yet CPQ would run out in 8 quarters. Pushing prices down further where Dell and CPQ would theoretically run out of money simultaneously would cause the whole PC industry pricing structure to unravel and damage it forever for everybody (even the consumer). It would take 6 quarters of HUGE losses with CPQ consuming 1.5x the cash per box for CPQ and Dell to both be "out of money" but not necessarily out of business. You see, the scenario you describe is virtually impossible so I wouldn't dwell on it too much if I were you. MEATHEAD

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