Life After Icahn: 7 Mounting Challenges Facing Dell1:30 PM EST Tue. Sep. 10, 2013
Defeating Carl Icahn was a biggie for Michael Dell, but it isn't the only hurdle facing his company over the next six months as it goes from public to private. Assuming Michael Dell wins his $24.8 billion leveraged buyout vote on Thursday, the company will be saddled with debt, looming layoffs and the challenge of integrating over two dozen acquisitions into one solution for channel partners.
CRN reviewed Securities and Exchange data and spoke to Dell partners and experts in order to put together this list of the biggest challenges facing Dell, with Icahn now in its rearview mirror.
As Dell reinvents itself as an end-to-end service provider, it needs to deal with the commodity PC part of its business. IDC recently downgraded its 2013 forecast for PC shipments from bad to worse, estimating that sales will take a near double-digit 9.7 percent dive this year.
In July, research firms Gartner and IDC released separate reports that suggested Dell's PC business accounted for $9.1 billion, a 5 percent year-over-year drop. According to Dell's most recent earnings report, more than half of Dell's revenue comes from PCs and accessories. Dell has said it will stay in the PC business because it acts as a springboard to selling other higher-margin products and services.
But, the challenge remains to quickly offset dwindling PC sales with business services.
Leveraged buyouts follow a familiar pattern where the new owners come in to chop up firms and sell them off for parts to pay back debt, said John Doggett, business management expert and lecturer with the Department of Management, McCombs School of Business, at the University of Texas. In addition to having to pay off an investment firm to manage Michael Dell's wealth, the Dell buyout will saddle the company with more debt, including $15 million of new debt from MSD capital, the $2 billion loan from Microsoft, and debt from several debt-facilities such as Barclays, Credit Suisse, Bank of America and Royal Bank of Canada.
According to Dell's most recent filings with the U.S. Securities Exchange Commission filing, Dell is carrying $4 billion in long-term debt before factoring in debt financing related to its $24.8 billion going private transaction.
It's no secret Dell has been dealing with an ongoing, rightsizing efforts as it preps to go private. "Dell has systematically been laying people off each month," said John Doggett, University of Texas business management expert.
He said the layoffs would be in keeping with Dell's jettisoning of old business priorities making commodity PC and its move to transforming itself into an IT services company.
Over the last 12 months, Dell has publicly confirmed five rounds of layoffs to its local paper the Austin Business Journal. Since the beginning of Dell's fiscal 2013 year, which began on Feb. 2012, Dell dropped 4,051 employees representing 3.6 percent of Dell's workforce, according to CRN calculations.
Dell needs to get more aggressive with its cloud services and move more quickly to provide public-private cloud services and transitions to private (utility-type) cloud services, said a number of channel partners.
Dell has the challenges of converting its know-how of working with hardware and storage solutions and translating lead generation, co-marketing, co-selling to apply to cloud services, said Dante Orsini, vice president of business development at Iland.
The challenge for Dell is productizing cloud services that can be integrated into the companies larger service and hardware offerings, said Michael Gavaghen, vice president of sales at SL Powers, a Boca Raton, Fla.
"We are waiting to see how Dell turns recent cloud acquisitions into services we can sell," Gavaghen said.
"Dell has a foothold in compute and storage, but it's playing catch-up when it comes to establishing a beachhead with cloud infrastructure and service providers," Orsini said.
While exact numbers of rank and file departures remain murky, the parting of executives over the past year is not. Since Dell has been mulling a transformation strategy, at least six executives have jumped ship since March of 2012.
In July, Dell communications leader Kelly McGinnis left for Levi Strauss & Co. as CCO. Also in July, Global Channel Marketing Executive Director Kathy Schneider departed the Round Rock, Texas-based after four years to take a job outside of the company. Dell reported that this past March Stephen Schuckenbrock announced his resignation as Dell's president, services.
In August 2012, Dell's president of enterprise solutions, Brad Anderson, left. In May of 2012, Colette LaForce, vice president and chief marketing officer for Dell services, departed. In March 2012, Dell's president of public and large enterprise business, Paul Bell, left the company.
For the past several years, Dell has been on a buying spree, acquiring over two dozen companies such as Quest Software, Perot Systems, Force 10 Networks and Wyse Technologies. Its challenge now is to synthesize these buys into one networking, software and services business.
"Combining those acquisitions into one cohesive integrated systems is going to be one of Dell's biggest challenges," said Paul Clifford, president of Davenport Group, a St. Paul, Minn.-based solution provider and Dell partner. But, Clifford said, it's a challenge that will be significantly easier out of the glare of Wall Street.
Dell reported revenue was up 8 percent in its Enterprise Solutions Group (ESG) from the year prior thanks to strong sales of hyper-scale servers and networking hardware. But while revenue was up, its income for ESG was down 9 percent, according to its last earnings report.
Comparing 2Q14 ESG's sagging profits of $137 million with its PC sagging profits of $205 million, it's clear Dell has a profit-versus-revenue challenge. Buying market share with razor-thin margins is one thing, but the real takeaway from these two data points is ESG produced even less profit than its fading PC business.