Preparing for the fight of his life, Michael Dell is taking the company he founded private - betting billions to gain breathing room for a deeply uncertain turnaround.
Dell Inc. announced Tuesday it is going to become a private company after more than 20 years on the Nasdaq Stock Market. The $24.4-billion (U.S.) deal is the largest leveraged buyout since 2007, and comes at a time when the PC maker is seeing continually weaker returns from its core business.
Mr. Dell and private equity firm Silver Lake Management LLC will put up most of the money, aided by a $2-billion loan from Microsoft Corp.
In many ways, the Dell buyout marks a low point in the life of traditional desktop computers.
Once one of the fastest-growing industries in the world, PCs have seen shrinking sales throughout much of the past decade, as consumers opt to keep their current computers longer, and eventually replace them with mobile devices such as smartphones and tablets.
"The traditional idea of getting a PC every three years has fallen to the wayside," said Tim Brunt, PC program manager for research firm International Data Corp. (Canada) Ltd.
"We're keeping PCs more like five years. There's a lot of devices still out there, the problem is people want to hold on to them for a little bit longer."
In many cases, a company going private can mark the signs of a maturing market. But for Dell and other desktop manufacturers, the PC market appears to have long ago passed its fastest growing period. So much so that Dell's game plan over the past two years has been to diversify as much as possible away from the business of selling desktop computers.
By taking the company he founded almost 30 years ago private, Mr. Dell largely insulates it from shareholder anger during what will almost certainly be a bumpy transition period. Dell is trying to move away from the traditional PC business and into more lucrative industries, including servers, network security and cloud-computing.
In some cases, the strategy has yielded successes, allowing Dell to gain a foothold in growing sectors such as health-care industry computer services. Other attempts didn't go nearly as well - Dell's attempt to enter the mobile industry with devices powered by Google's Android operating system proved a flop. Now, as the company continues to reframe itself in a post-PC world, it no longer has to worry about provoking the wrath of public shareholders. Should the strategy succeed, Mr. Dell will reap the rewards; should it fail, he assumes much of the risk.
"Dell has made solid progress executing this strategy over the past four years, but we recognize that it will still take more time, investment and patience, and I believe our efforts will be better supported by partnering with Silver Lake in our shared vision," Mr. Dell said in a statement. "I am committed to this journey and I have put a substantial amount of my own capital at risk together with Silver Lake, a world-class investor with an outstanding reputation."
A look at the numbers explains why Dell has been so eager to reduce its reliance on PC sales. According to IDC research, global PC shipments dropped 7.8 per cent in 2012 from the year before - the largest decline since the first quarter of 2001. In Canada, the situation was even more dire, with a 13.8-per-cent drop, the worst of any region.
Much of the decline is owing to the rise of mobile computing, as consumers increasingly opt for tablets instead of new desktops. Retailers, in turn, have begun reserving prime display locations in their stores for mobile devices, rather than PCs.
The good news, if there is any for PC manufacturers, is that the average selling price of a desktop computer is actually going up. That's because, at the low end, consumers are largely opting for tablets and smartphones instead of low-cost PCs. As such, the remaining sales tend to be high-end, high-margin desktops. In Canada, for example, the average PC selling price is about $860, according to IDC research - in Japan, it's closer to $1,300.
But that's not necessarily helpful for Dell, which is, at its core, not a high-end PC manufacturer. Indeed, when the company revolutionized the industry in the 1990s, it was as a volume seller of affordable desktop computers.
That strategy worked so well that, at its peak during the dot-com bubble, Dell's shares soared to more than $55 (U.S.). But as the bubble burst and then as consumers ditched low-end PCs for mobile computers, Dell's troubles began mounting. By 2008, the company's share price was half of its 2000 high - by late 2012, it had been cut in half once more. On Tuesday, Dell shares closed at $13.42.
The PC market has been declining worldwide since the beginning of 2011, but Canadians are leading the trend, with numbers from 2012's fourth quarter showing the Canadian market suffered the largest annual decline of all regions. It marked the eighth consecutive quarter of decline.
Canadian year-over-year PC market decline
DELL INC. SNAPSHOT
Jun. 1988 - Dell launches its IPO
1996 - Dell begins selling PCs through its website
Mar. 22, '00 - $58.13
2001 - Dell becomes the No. 1 PC provider worldwide
Feb. 5, '13 $13.42
MARKET CAP (in $ billions)
'90 - 0.189
'95 - 2.5
'00 - 102.6
'05 - 89.5
'10 - 27
'13 - 23.05
GLOBAL MARKET SHARE
Of total PC shipments in 2012 estimated at 352.7 million units
HP - 16.0%
Lenovo - 14.8%
Dell - 10.7%
Acer - 10.4%
Asus - 6.9%
Others - 41.3%
THE GLOBE AND MAIL
SOURCES: REUTERS; GARTNERReport Typo/Error