Dell going private can generate uncertainty for CIOs

By Carter Lusher, Research Fellow & Chief Analyst: Enterprise Applications Ecosystem

Dell going private makes strategic sense. Dell is in the midst of a wrenching transition from a supplier of commodity hardware, mainly traditional PCs, to a supplier of enterprise-grade IT infrastructure. Dell’s ambition is nothing less than offering the entire IT stack with supporting services.

While this transition has been going on for several years, there is still much that has to be done. Unfortunately for Michael Dell and his executive team, they are trying to make this transition as a public company with the albatross of meeting the next quarter’s earnings expectations hanging around their necks.

However, going private is not a panacea as there are heavy costs associated with a change in ownership structure of this nature. The biggest risk likely to face Dell is that enterprises and public sector organizations cut back on their purchases “until the dust settles.”

A multi-billion dollar buy-out implies radical changes

Dell has been making the transition from PC company to enterprise IT infrastructure supplier for several years. In fiscal year 2005, “clients” (desktop and mobility) comprised 67% of Dell’s revenues.

Through nine months of fiscal 2013, that number had dropped to 50%. However, the gradual reduction process hit a major problem due to the increasing popularity of smart devices (tablets and smartphones) that appears to have cut into sales of traditional PCs.

In the first nine months of FY 2013, Dell’s client revenues dropped by 13% year-over-year, accounting for almost all the reduced revenue of Dell overall. And it is only going to get worse. According to Ovum projections, smart devices are expected to have a compound annual growth rate (CAGR) of 22% across the period 2012–17, rising to 349 million units in 2017. Obviously traditional PCs are experiencing dramatic market disruption.

With the growing popularity of tablets and smartphones as replacements for laptops and Dell not having credible products in the smart device market, Dell gradually weaning itself off PCs needs to be accelerated. Even an accelerated transition will require several years, likely leading to quarterly revenue declines and losses.

It is unlikely that financial analysts and investors would be tolerant of negative financial news, which is why taking the company private is an attractive plan.

The implication of going private is that Dell is planning radical changes to its strategy and product roadmap. While the company might come out of this transition stronger with a product lineup that better meets the needs of businesses and public sector organizations, there will be uncertainty as to what products and services stay, get strengthened, or get eliminated.

Crystal clear communications is the critical success factor

This type of ownership change is not intricately smart or dumb; rather, it is simply a tool. What matters is the execution.

A major danger for Dell during this period is that business and public sector prospects and customers stop buying Dell’s products and services by adopting a “wait and see” approach. This transition will be seen by strong competitors such as IBM and Oracle as a prime opportunity to attack Dell’s enterprise and public sector prospects and customers by heightening the uncertainly in contrast to their stability.

Ovum sees effective communication to prospects and customers about its strategy and product roadmap as a critical success factor to get through the transition.

While this might sound simple, it is not. Compounding Dell’s challenge is the deep-seated brand identity as a “PC company,” which is only reinforced by the press’s characterisation of Dell as a PC maker in every article, including headlines.

Another communications challenge will be how Dell Services (built on the Perot acquisition) shares its financials for the due diligence phase on large, multi-year IT services deals. This is a non-trivial problem as the major IT services vendors (such as IBM and Accenture) are public companies and routinely provide details on financials.

Enterprises and public sector IT need to future-proof their plans

Ovum is not recommending that CIOs and IT executives stop buying from Dell. Rather, IT organizations need to assess the risk to their infrastructure and put into place plans should Dell’s radical hardware, software, and services shifts require changes to procurement plans.

One opportunity for organisations that are in contract talks with Dell is to drive a hard bargain, whether on prices or incremental product or services to be added at no additional charge. A better deal for a contract today is only reasonable to offset the increased risk premium associated with Dell for the immediate timeframe.

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