Dell going private: What are its implications?

BANGALORE, INDIA: Michael S. Dell, founder, chairman and chief executive officer of Dell, in partnership with technology investment firm Silver Lake, has decided to acquire his own company for an estimated price of $24.4 billion.

The company's official statement says that under the terms of the agreement, Dell stockholders will receive $13.65 in cash for each share of Dell common stock they hold, in a transaction valued at approximately $24.4 billion.

"The price represents a premium of 25 percent over Dell's closing share price of $10.88 on Jan. 11, 2013, the last trading day before rumors of a possible going-private transaction were first published; and a premium of approximately 37 percent over the average closing share price during the previous 90 calendar days ending Jan. 11, 2013. The transaction is expected to close before the end of the second quarter of Dell's FY2014," it adds.

Michael Dell believes that this transaction will open an exciting new chapter for Dell, its customers and team members and sounded optimistic about a comeback.

"We can deliver immediate value to stockholders, while we continue the execution of our long-term strategy and focus on delivering best-in-class solutions to our customers as a private enterprise. We believe this transaction strengthens Dell's capabilities to bring industry-leading, differentiated, simplified and easy-to-manage solutions to customers worldwide."

He further noted that he has a huge risk at hand and needs time to get things back on track.

"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. We are committed to delivering an unmatched customer experience and excited to pursue the path ahead. 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.

Egon Durban, a Silver Lake Managing Partner, said: "Michael Dell is a true visionary and one of the preeminent leaders of the global technology industry," said "Silver Lake is looking forward to partnering with him, the talented management team at Dell and the investor group to innovate, invest in long-term growth initiatives and accelerate the company's transformation strategy to become an integrated and diversified global IT solutions provider."

What analysts said about Dell Buy out

Forrester Research analyst David Johnson feels the best thing Dell can do right now is get out from under the pressure of quarterly earnings announcements, Sarbanes-Oxley regulations, and other rituals common to public companies in the US, and focus the company on a new strategy.

Apart from the founder and investor's money, Microsoft has also invested about $2 billion into it.

"The investment from Microsoft brings many very good possibilities, including, more control over the user experience for the Windows desktop operating system with PC and tablet hardware. It also brings opportunity to build new converged infrastructures for packaged applications, as well as cloud infrastructures that will bring these to a price point and level of simplicity that smaller firms can afford them and to focus the company's resources and make better trade-offs for execution and strategy," David adds.

As to why it will be a win-win investment for Microsoft as well, David says: "Microsoft needs four things:

1. More expertise in design, manufacture, distribution and especially enterprise sales of Windows PC hardware.

2. More dedicated focus across enterprise sales, software and services on Microsoft solution sets and platforms.

3. A stronger enterprise go-to-market channel for hardware.

4. This one is the most important: Enterprise IT needs to have ways to build their own world-class private cloud infrastructures that are orders of magnitude easier to achieve, without having to put the pieces together in-house. In the face of VMware and others surrounding software defined datacenters, converged infrastructures that unify not just different hardware domains like compute, network and storage, but also the software to provision, operate and monitor it will be critical. A Microsoft investment in Dell could really shake this up in short order.

"It would also put significant pressure on HP who is already reeling from years of board-level mismanagement," David adds.

Carter Lusher, chief IT analyst, Ovum, said that Dell going private will generate uncertainty for CIOs.

"Dell is in the midst of a wrenching transition from a supplier of commodity hardware, mainly traditional PCs, to being a supplier of enterprise-grade IT infrastructure. Dell's ambition is nothing less than offering the entire IT stack with supporting services. A significant risk likely to face Dell during this transition is that enterprises and public sector organizations cut back on their purchases "until the dust settles," Carter added.

The analysts feels that a major strategy shift is in the works, especially after the departure of Dell's chief strategy officer, David Johnson a few weeks ago.

"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 strengthen, or get eliminated," noted Carter.

Ovum sees effective communication to prospects and customers about its strategy and product roadmap as a, if not the, 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." 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.

Carter also added that CIOs need to asset the risk to their infrastructure and put into place plans should Dell's radical hardware, software, and services shifts require changes to procurement plans."

Dell's rivals take a shot

While, HP the largest PC maker made no qualms in saying 'it plans to take full advantage of that opportunity,' Lenovo, the second largest PC maker, was more diplomatic and said they are focused and will not be distracted by 'financial maneuvers and major strategic shifts'.

HP in an official statement said also added that Dell has a very tough road ahead.

"The company faces an extended period of uncertainty and transition that will not be good for its customers. And with a significant debt load, Dell's ability to invest in new products and services will be extremely limited. Leveraged buyouts tend to leave existing customers and innovation at the curb. We believe Dell's customers will now be eager to explore alternatives, and HP plans to take full advantage of that opportunity," its statement added.

Lenovo in its official statement said: "The financial actions of some of our traditional competitors will not substantially change our outlook. Our strategy is clear, our financial position is healthy and our business is very strong - so we are focused on our products, customers and overall execution rather than distracting financial maneuvers and major strategic shifts."