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Dell: Enterpise IT leaders will face serious choices

Analysts generally welcome move to go private but highlight potential risks for customers

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Michael Dell’s move to take private the company he founded has received a cautious thumbs up from industry analysts.

Dell was once valued at more than $100 billion, but its founder is now trying to take it off the stock market for $24.4 billion. That is still a 25 percent premium on what the shares were trading at before ‘rumours’ of the de-listing plan first emerged.

Michael Dell is putting his 15.7 percent holding into the new company and has secured backing from private equity firm Silver Lake alongside a $2 billion loan from Microsoft.

Forrester analyst Dave Johnson said the move would have little immediate impact on Dell's enterprise customers:

"There will be changes, no question, but customer facing roles usually get shored up during transitions like this to help ease the risk and keep relationships intact. Also, we don't expect Dell to jettison the PC business.

“It's easy to draw comparisons to IBM and Lenovo, and one could argue that the case for running an OEM hardware business out of the US is sketchy, but IBM had many other very strong businesses to fall back on.

“PCs still make up a significant piece of the pie for Dell and they'll need the cash-flow to double-down on the areas where they can drive new value and differentiation.”

Veteran UK analyst Richard Holway also homed in on the PC business. “Dell was a poster child of the PC age,” he commented. “It/he did a great job... but those ‘on-premise’ days are over. To its credit, Dell has taken steps to ‘reinvent’ itself with services and software. But Dell is still c70% dependent on PC sales.

“Restructuring in the constant gaze of quarterly reporting is pretty tough. Indeed, making the ‘this will hurt profits for 2+ year’-type of move is almost impossible as a public company. I say ‘almost’ because there are some – IBM is the best example – that have pulled off such transformation. But even they took 10+ years and had a rather deeper/wider base even than Dell.”

Holway noted that whatever Dell does now – whether it decides to sell, kill off or even maintain the PC business, it will be easier to do as a private company. He also questioned claims that private equity investors may be as hard to please as the stock markets.

“Silver Lake has perhaps the best record of any of ‘pulling this kind of thing off – and making themselves and their backers/partners a mint in the process. But this is a big bet even for them,” he noted.

Carter Lusher, Chief IT analyst at Ovum, agreed that the move made strategic sense, but warned that the move implied Dell was planning “radical changes” to its strategy and product roadmap.

“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 organisations cut back on their purchases ‘until the dust settles’.

“While the company might come out of this transition stronger with a product line-up that better meets the needs of businesses and public sector organisations, there will be uncertainty as to what products and services stay, get strengthen, or get eliminated.  

“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.”

Lusher urged CIOs with close ties to Dell “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.”



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