The Real Problem With Dell Is Very Simple: Michael Dell

Michael Dell

As of yesterday, Dell and private equity firms Silver Lake and TPG were still just talking about a massive deal to take the company private.

Now Fortune reports that TPG has walked away.

That leaves Silver Lake to figure out how it could take on the biggest leveraged buy-out Wall Street has seen since before the financial crisis, when a lack of credit made it impossible for a deal this large to get done.

All told, estimates put the size of a potential Dell deal at $23 to $25 billion, with about $5 billion kicked in by private equity firms.

That’s nothing to sneeze at, and observers have already pointed out that no private equity firm could raise that kind of capital alone. So now that TPG is out (it was in totally separate negotiations from Silver Lake), we’ll have to see if any other big PE players enter the ring.

Either way, for its part, Silver Lake isn’t giving up, according to the WSJ.

Silver Lake Partners was in discussions Tuesday with Dell for a leveraged buyout at around $13 to $14 a share, according to a person familiar with the matter. The buyout group would include the private-equity firm, at least one other investor such as a pension or sovereign wealth fund, and Mr. Dell, this person said.

Michael Dell himself owns 16 per cent of the firm, so that makes financing the deal a little easier. At the same time, there is an inherent conflict of interest investors consider when the management of a company enters a buy-out deal as a major player.

Sure, having an independant board helps with this conflict. Also, dealmakers can negotiate “go-shop” agreements that open the door to competing bids in the event of disagreements between parties. 

Still, there’s another, brutal issue with management’s role in this buy-out that Fortune’s Katie Benner discusses. Benner points out that Michael Dell is not an innovator, and with the power he would likely retain in this deal, he would still be at the head of a company that requires innovation.

From Fortune: Fortune chronicled in a 2011 look into the company, Dell has been an architect of his company’s strategy woes as much as he was the genius behind its initial manufacturing success… His plan has been to acquire scores of small companies and hope that the new entrepreneurs injected some innovation, fresh ideas and talent into the company…

Michael Dell seemed unconcerned that these acquisitions were just too small to move the revenue and profit needles. And he alone seemed to set the parameters for the company’s vision and mission…

Most companies go private because they have an execution problem, and a buyout firm promises a solution that’s often some combination of cost reduction, management changes, and a bold strategy shift. Dell is already known for being among the most cost conscious companies around. Michael Dell’s likely involvement post-buyout will mean no real management change. And he has made it clear over the last six years that he does not favour bold strategy shifts. He prefers to change the company in a slow and steady fashion, much like Lou Gerstner at IBM before him. But IBM was ahead of the curve when it moved away from PCs. Dell is behind that curve, and doesn’t have the luxury of time.

In short, Benner points out that the problem with Dell isn’t that it’s a public company, it’s that it’s a public company run by Michael Dell.