Will Michael Dell become the Marlboro man of the PC age?
You've come a long way baby... now get off the stock market
Comment The mooted Dell takeover, the one to take it private again, is now happening. The big question is why?
Why come off the public markets to operate as a private company again? The obvious and logical answer here being that the people buying the company think they can make more money this way than by not doing it. Why do they think this?
First, a little bit of finance for you: the current value of a company is the discounted value of all future profits that company is going to make. There are qualifications to this - over risk, future interest rates, opinions and all sorts of lovely things - but we'll ignore them and stick with just the simplest definition.
There are two ways of increasing those future profits: grow the company with something whizzy, or reduce expenses while not doing anything whizzy. Which strategy will actually increase the value of the company the most depends upon circumstances.
Which is where we get to compare Microsoft and Dell to Senior Service and Woodbines.
There's nothing that particularly says that a company should last forever nor that it shouldn't. In theory it should righteously last as long as it makes profits greater than the cost it is paying for the capital to make those profits.
Companies tend to do this by carving out a niche for themselves. And it's most certainly possible to thrive mightily when one has found that niche. Take the cigarette companies for example: they've made many billionaires over the past century by flogging cancer sticks to people. And there most certainly was a time when they invested heavily in advertising and the like to expand their market and sell even more of them - all to make yet more in profit.
But expansion of their market just isn't possible in the industrialised world, for consumer and legal reasons. Smoking is, however slowly, a dying (sorry, sorry) activity, and so at some point in the not too distant future those companies are themselves going to die.
What is the rational response to this? For the management, it's obvious: find something else for the company to do so they get to keep their highly paid jobs. For the shareholders it isn't. It could well be that simply sweating the dying industry is the best option; don't bother trying to find something else to do, they'll say. Don't invest in new businesses. Don't take risks: just take that vast and steady stream of profits over the next couple of decades and bank them. And when the company dies, well, c'est la mort.
Whether this is actually true for any specific company isn't quite the point. It's that it's potentially true for many a company. Stop faffing around trying to get into businesses you know nothing about, have no particular talent for, and just milk the profits from what you currently do then go home.
Meanwhile, in the IT world
Which brings us to the tech business. I don't think anyone would be all that surprised if I claimed that we're going through a sea change as large as the PC revolution itself. The move to smartphones, tablets and the cloud is overturning the order established in recent decades. And it's not entirely obvious that those who made out like bandits in that PC revolution have all that much to offer in this new marketplace.
It might be that their shareholders would be better off hunkering down and riding the dying specialities into the ground rather than attempting to breathe new life into old companies.
One example might be HP and its purchase of Autonomy. It's certainly arguable that the parent's future profits would be higher if it hadn't splurged on the second best of Cambridge*. Having spun off Agilent, which does obviously have a future, well, why not just take the next decade of profits or more and stop thrashing around in search of a vision or strategic path?
Another could be Microsoft itself. Indeed, it's rather a stronger argument to say dividends would, cumulatively over the years, be higher if the company just gave up on phones, Bing, Skype and all the rest, and simply milked Windows, Office and the XBox during the inevitable gentle decline.
And then there's Dell of course, the real subject under discussion. What Michael Dell really did, in a business sense, was manage to turn a manufacturing operation into an organisation with a positive positive cash flow. A most unusual achievement, but that's what he did.
Dell's customers cough up for machines that aren't even built yet. An order goes to the factory and the parts to build it come in from the warehouses just alongside said factory. But those warehouses are populated with parts stored there on the suppliers' credit: Dell doesn't even start the clock ticking on the 90-day credit terms until the piece crosses the boundary into the factory. Dell gets its money at the order and pays out to its suppliers 90 days later. Wonderful stuff if you can actually manage to do that as they did.
But there's nothing in this incredible achievement that's particularly transposable over to the current business world. Supply chain management doesn't translate into being a great software integrator, for example, nor to distributing phones and tablets made at Fortress Foxconn.
There is always the possibility that the thrashing around will produce a new line of business that heralds a return to the sunlit uplands of expansion again; of course there is. But it does tend to be new companies that manage this, not old ones re-engineering themselves that do (IBM being an obvious tech industry example of a company that did manage it).
Which leaves the "why go private?" part. Essentially, either strategy is a great deal easier to achieve if you've not got to make quarterly reports on what you're achieving or not achieving, as the case may be.
Think of it this way: if you are running around, like a headless chicken, searching for something, anything, new to do then in the absence of anything amazing turning up soon you're vulnerable to someone coming in and taking you over in order to ride that core business down to its destruction. There's still a business somewhere inside HP doing this too, maintaining whatever DEC equipment still exists at what are I'm quite certain are lovely profit margins.
If you use this second strategy - decide to ride it down yourself - well, why would you stay public? You've already decided that the company is worth more by not trying to move into new areas so why let the mug shareholders have any of that value?
Which of the two Dell is going to follow is, of course, as yet unknown. But which do you fancy? Big Blue's renaissance Mk II? Or Woodbines? ®
* The best being ARM of course.
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