Tuesday, November 4, 2014

Michael Dell Has Pulled The Wool Over Shareholders--Again

Photo: Damon Winters/New York Times

The New York Times article today is a nice puff piece about Michael Dell's "disdain" for Wall Street and all its "circus clowns," of which there are certainly many, to be sure.  Mr. Dell will try to persuade people that his company is "about far more than the personal computers and computer servers it had been known for, with products intended for things as varied as cloud computing networks of global enterprises and handy personal devices"

What's unusual about all of this?  Mr. Dell's comment that "It is a transformation....he actually started about six years ago, spending $18 billion on 40 acquisitions..."  So, let's get this straight, there was the public disclosure about declining margins on PCs and a gloom and doom future.  Meanwhile, there was an undisclosed, private story built around the acquisitions as a platform for generating significant shareholder value.  This transformation would take time and investment.  Yet, the only thing communicated publicly was gloom and doom and feigned frustration with a faceless "Wall Street."  

Had a coherent plan for long-term value creation been laid out, with numbers, metrics and market opportunities, the shareholder base would have turned over from those playing a short-term rebound in PC volumes and pricing to those long-term shareholders, like Southeastern Asset Management, who did sense that there was more value in the portfolio than the short-term financials demonstrated.

Southeastern would itself have brought other like-minded investors with it.  Carl Icahn would have huffed and puffed, but with long-term shareholders firmly aligned with the founder, board and a few analysts, he would have gone away.  

The fact that Southeastern made the proposal for existing shareholders to retain a stub interest in Dell post-buyout is the clearest indication that they had tumbled on to the value inherent in those acquisitions and in a transformation led by a motivated CEO.  Silver Lake Partners understood the game that was afoot.

Mr. Dell's complaint in the article about a board of directors impeding speed in deal-making and alliances seems hollow and self-serving.  A board approved $18 billion spent on 40 acquisitions, didn't they?  And, it sounds like they didn't really ask too many questions about the stealth six year plan.  If they had, they might not have agreed to the buyout transaction as it was done.

Of course, another benefit of being public is the ability to use stock options to build out the kind of deep team needed to pull this transformation off. In a private company carrying a lot of debt and with a sponsor looking for special dividends and conserving cash, compensation arrangements are more arcane and probably won't extend down into the organization.  

This story continues to be a very cynical one where long-suffering and newer, long-term equity investors weren't treated well.  If the company were to come public in the future, Mr. Dell will use those same Wall Street "circus clowns" he sneers at to tell the public that the new Dell IPO stock is a "Strong Buy."  

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