FE Editorial : The Dell spell

Written by The Financial Express | Updated: Feb 7 2013, 06:12am hrs
Dells decision to de-list itself from stock markets can be seen in many ways. Some see it as a sign that the PC market is well and truly done. Others say that the move is a result of Dells inability to keep up with technologys shift from PCs to tablets and smartphonesDells entries in both segments failed miserably. Yet others, however, say that the $13.65-per-share buy-out deal between Michael Dell, private equity firm Silver Lakes and Microsoft is one of the shrewdest moves made by a company looking to reinvent itself. While the first two opinions may be true, Dells activities over the last few years and the details of the deal itself highlight the veracity of the third. Between 2009 and 2012, Dell has been on a cloud-computing and IT services acquisition streak. In 2009, it bought Perot Systems and launched Dell Services, its end-to-end IT services business. In 2010, it snapped up companies in storage, systems management and cloud-computingBoomi, Exanet, InSite One, KACE, Ocarina Networks, Scalent and Compellent. The next year saw it rounding out its enterprise capability with yet more acquisitions. However, it was in 2012 that the company made its intentions clear, according to analysts. It bought cloud-computing firm Wyse Technology and its almost 200 patents, which set it up for a decisive move to cloud computing.

A point worth mentioning, made in a Forbes analysis of the deal, is that Microsoft pitching in $2 billion worth of debt financing is mostly self-serving. The majority of its Windows revenue comes from PCs, and so $2 billion to help out the second-largest PC maker in the US at a time when the PC market is slowly dying seems like the least it can do. And keep in mind that Silver Lakes itself is no slouch at spotting opportunitiesits previous two high-profile investments have been in Skype and the Chinese e-commerce giant Alibaba Group. Both have grown tremendously since then.

Now, the $24.4 billion buy-out deal. As Felix Salmon of Reuters points out, Silver Lakes has bought Dell extremely cheap. Taking into account Dells roughly $60 billion-a-year revenue, gross profits of almost $14 billion and net income of $2.5 billion, this means Silver Lakes is paying less than 10 times earnings for the third-biggest PC manufacturer in the worlda steal. Even after servicing its debt, Dell will have more than enough to invest in cloud-computing and IT services. And all this without the recurring pressures of quarterly results and demanding investors.