Dell Feels the Heat


They sure fit my definition of gluttons for punishment. Some 100 Dell (DELL) shareholders trudged through the sweltering Texas heat on July 21 to sit through the company's annual meeting, which started promptly at 8 a.m. in the Austin Convention Center.

They couldn't be happy that their stock was worth about half what it was a year ago. And the afternoon before the meeting, management had dropped the bombshell that second-quarter revenue would come in a couple of hundred million bucks light and that earnings would fall short by about 30%. During the course of the compressed one-hour meeting, Dell's stock dropped 10% and was selling at $19 per share, a price it first attained in 1998.

These tortured shareholders nevertheless showed, with two pressing concerns: What in the world is wrong with their once high-flying company, and what were Chairman Michael Dell and CEO Kevin Rollins going to do to fix it?

NOTHING NEW. The answers they got were pretty underwhelming. Rollins emphasized "perspective," calling attention to Dell's remarkable 10-year record, which saw revenues soar more than 900%. As for the company's current troubles, he cited a "challenging" and "competitive" marketplace that had led Dell to "aggressive" pricing (see BusinessWeek.com, 2/23/06, "It's Dell vs. the Dell Way").

The future? Rollins made it perfectly clear as he has in other venues that Dell will not resort to any radical new strategies. It will stay the course and improve on its vaunted direct-selling model. He cited the hiring of 2,000 new staff and retraining 5,000 other as success in providing better service, a sore spot with some customers.

This has helped get "hold times" for customer calls down 50% and helped drive up customers' "repurchase intention" to its highest level in five quarters, Rollins said. He also pointed to revenue growth of 20% or more in such international markets as China, Canada, Germany, and France; Brazil is running 84% increases. Dell's international business accounts for approximately 40% of sales (see BusinessWeek.com, 11/11/2005, "Dell's Slight Change of Emphasis").

THE CASE FOR DIVIDENDS. But shareholders seemed interested in more extreme measures. Several came armed with specific suggestions to get the company back on track. Some of the advice: Stop ripping off shareholders by making megagrants of stock options to executives who just aren't getting it done, start paying a dividend, and clean house at Dell's executive suite.

Linda Bush, a Central Texas realtor and the self-described "dividend lady," made a plea as she did last year for Dell to step up to the plate and start giving shareholders a regular payout. "When I brought this up before, the response was that this is a growth company and that they would consider paying a dividend if they become a value company," she told the meeting. "Well with the p-e [price-earnings ratio] around 13 this is indeed a value company now."

A shareholder resolution urging dividends got only 7% of the votes, but after the meeting Bush claimed that any showing over 2% indicated strong support for the proposition.

NOT IN OMAHA ANYMORE. Another shareholder—who refused to identify himself except as a money manager based in Austin—made an impassioned plea for shareholders to push for reform of Dell's stock option practices. By his reckoning, for most of the last decade Dell used about $11 billion—half of its total profit— to buy back shares. But because so many shares were used to fund stock option rewards to executives, the number of outstanding shares had hardly budged.

Dell has drastically cut back its use of options and buybacks and has reduced the number of shares by about 8% in the past year, according to the company. But the money manager insisted that the company is still lavishing far too many options on executives.

Because Michael Dell shut down the meeting at precisely the one-hour mark, there was time for only eight shareholders to take part in the Q&A. "It really felt like we were being cut short," said Robert Liedke, a shareholder who has attended the relatively freewheeling meetings of Berkshire-Hathaway (BRK.A). "The Dell executives' responses just seemed rehearsed or canned."

HANGING TOUGH. After the meeting, a few shareholders said that the real question at Dell is whether it needs a new top management team. "They're just stuck in the mud with their original model," said Carol Townsend, a shareholder from Houston. "Just look what a new CEO has done for shareholders of Hewlett-Packard (HPQ)."

A former sales manager who worked for Dell 16 years and asked that his name not be used said that the executives had put on "a lot of show with very little substance." He asked, "How many mistakes in pricing and how many misses does it take before you make a change at the top?"

Cheril Patteson, a longtime shareholder who works in alumnae relations at the Univeristy of Texas' San Antonio campus, said she wasn't all that interested in getting a dividend and is prepared to stay the course and trust management as it tries to improve things. "I'm afraid it's going to take a long time, though. I worry about the older stockholders who don't have time to get their money back."


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