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Dell’s Small-Stuff Obsession Confronts Complexity of LBO

February 06, 2013

Dell’s Obsession With Small Stuff Confronts LBO Complexity

Michael Dell, chief executive officer of Dell Inc. Photographer: Tony Avelar/Bloomberg

Michael Dell, after a lecture at the London Business School in 2001, was asked whether he could be assured of his company’s leadership in personal computers, given rivalry from the likes of Hewlett-Packard Co. (HPQ:US)

“He said he could not imagine any conditions under which HP could catch up with Dell,” said Mathew Hayward, an associate professor at the University of Colorado, Boulder, who attended the talk. “There were so many little things that Dell was doing well that it would be impossible.”

Michael Dell’s faith in small stuff, which initially served his namesake company well, later contributed to its decline. Dell’s early success came from slashing pennies from component prices and tightening supply chains to trim days off delivery times -- not from inventing product categories or adopting bold new strategies. As chief executive officer, he avoided investing heavily enough in smartphones or music players, and he was late to the shift to cloud computing.

The strategy caught up with Dell, leaving the company he built from a university dorm room ill-equipped to adapt to changing demands from consumers and businesses or to vie with nimbler competitors in mobile and data-center technology. After years of market-share losses and tumbling shares (DELL:US), Dell orchestrated a $24.4 billion buyout using his own wealth, his stock in the company, a loan from Microsoft Corp. (MSFT:US) and investment by private-equity firm Silver Lake Management LLC.

Even after going private, the company won’t be making radical moves overnight, Chief Financial Officer Brian Gladden said in a Feb. 5 interview.

Patience Required

“It’s going to take more time,” Gladden said. “It will take more patience and investment for us to deliver.”

Dell also isn’t considering parting with its low-margin PC division, the company said in a regulatory filing.

“We have the resources and the backing to do incredible things and to lead our company on to great successes,” Dell said before a crowd of staff members yesterday in Las Vegas. “I’m very excited. I think the upside for our company is huge.”

The remarks evoked a Michael Dell of a bygone era, like the one who at the age of 12 set up a national mail-order stamp auction that netted $2,000. He later dashed his parents’ hope that he’d become a doctor. Instead he dropped out of the University of Texas to focus on his dorm-room business of cobbling together PCs at a lower cost than market leaders International Business Machines Corp. (IBM:US) and Compaq Computer Corp. Rather than maintaining expensive networks of dealers and retailers, he drove a frat-like corps of 20-something tele-sales representatives to revolutionize how PCs were sold.

Dell Box

After the Netscape browser made the Internet mainstream, Dell devised processes to let customers easily configure, order and track PC purchases with no human interaction. Over time, Dell expanded from basic corporate desktops and laptops into the more lucrative server business.

“He takes it very seriously that his name’s on the side of every box that goes out,” said Phil McKinney, the former chief technology officer in Hewlett-Packard’s PC division who’s now CEO of CableLabs, a provider of cable technology.

Having forced rivals to adopt its low-cost operating model, Dell established itself as a leader in consumer PCs as well. It developed a brand so strong that the company was able to overcome snafus such as the 2003 arrest of Ben Curtis, the company’s “Dell Dude” pitchman, after trying to buy marijuana.

More recently, though, Dell has responded more slowly and less successfully to new threats. Years after Apple Inc. unveiled the iPod, Dell introduced its Dell Digital Jukebox music player and then discontinued it three years later.

Phones, Adamo

It started selling Dell-branded big-screen TVs in 2003 before scrapping the effort in 2007. A smartphone introduced in 2010 lasted only a year. Dell dabbled in retail kiosks with limited success.

Dell also stumbled with the 2009 introduction of the Adamo, a $2,000 laptop meant to tap into an imagined luxury market for Windows PCs, marketed with modernist black-and-white ads. The product failed to find many buyers, in part because Dell’s sales force focused on low-priced machines to compete with Acer Inc. and Asustek Computer Inc., according to a former executive.

“That didn’t go so well,” Dell said in a 2011 interview in his private conference room at Dell’s Round Rock, Texas headquarters, speaking in his trademark staccato style. “Mistakes were made, lessons were learned, and move on, keep going.”

EMC Considered

Michael Dell was also reluctant to pursue transformative acquisitions.

Kevin Rollins, who was operating chief before becoming CEO in 2004, wanted the company to acquire EMC Corp., the world’s biggest maker of storage computers, according to a person with knowledge of the matter. Dell said the deal was too risky, said the person, who asked not to be identified because the discussions were private.

EMC, with a market capitalization (EMC:US) north of $50 billion, is a leader in business computing and benefits from its majority ownership of VMware Inc., the biggest maker of software that lets computers run multiple operating systems.

Dell favored more modest deals, acquiring Alienware Corp., which made souped-up PCs for video gamers, in 2006.

Under Dell, the company resorted to cutting costs too aggressively at times to shore up a failing business model, Hayward said.

Intel, Outsourcing

In the early part of the last decade, faced with increasing pressure from low-cost Asian rivals such as Acer and Lenovo Group Ltd., Dell outsourced much of its customer-support operations to India. After a much-publicized backlash, the company pulled some of these call centers back to the U.S.

In 2010, Dell paid $100 million to settle accounting-fraud charges brought by the U.S. Securities and Exchange Commission that the company had failed to tell investors it accepted payments from Intel Corp. for refusing to use chips from other suppliers. The payments allegedly helped Dell meet earnings projections from 2001 to 2006.

Dell has rarely publicly expressed concerns about his company’s strategic direction. He’s well-liked by other technology CEOs, and is known for rapidly responding to e-mails and for spending hours chatting with analysts over cocktails at investor conferences.

The affable demeanor belies a prickly side. When an analyst showed that the company had lost $38 million using risky currency hedging practices in 1992, Dell threatened to sue.

HP Tweet

When Hewlett-Packard said publicly in 2011 that it might sell off its PC business, Dell sent a Twitter message saying, “Goodbye HP, Sorry you don’t want to be in PCs anymore. But we do more than ever.”

Dell handed the CEO reins to Rollins in 2004, and while he remained engaged with the company, he also spent more time on personal pursuits, such as building an 18,500 square-foot home in Hawaii and taking a stake in Kona Village Resort, a Hawaiian resort long favored by tech luminaries including Steve Jobs.

In 2007, with Dell’s business quickly deteriorating, Rollins was pushed out and the company declared the return of Michael Dell -- even though the two executives had been working closely and shared few major differences of opinion, according to executives who know Dell.

Upon his return, Dell set about girding his company for the new realities of the technology landscape, spending $12.7 billion on 18 acquisitions since 2009.

“Clearly the next phase of Dell’s evolution as a company is all about growing beyond where we started, and very deeply into services and software and solutions,” Dell said in the 2011 interview. “That keeps me plenty energized and plenty excited.”

Dell has considered taking the company private for years, talking publicly about the prospect in 2010. Before settling on an LBO he also considered breaking up the company, separating PCs from the areas focused on data centers and other products for businesses, people with knowledge of the matter have said.

A 31 percent decline in his company’s share price in 2012 made a buyout all the more affordable -- and necessary.

To contact the reporters on this story: Peter Burrows in San Francisco at pburrows@bloomberg.net; Aaron Ricadela in San Francisco at aricadela@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net


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  • HPQ
    (Hewlett-Packard Co)
    • $37.83 USD
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