October 16, 2019

Strategies: At Dell, a Gamble on a Legacy

By making personal computers that were powerful, reliable and inexpensive, and by selling directly to buyers who customized their PC features, Mr. Dell revolutionized his industry.

“The original PC industry was long on people with great technical ideas but short on people who were able to turn those ideas into opportunities — into products that people really wanted,” said Timothy Bresnahan, a Stanford economist. Along with Steve Jobs and Bill Gates, as well as Scott Cook of Intuit, Mr. Dell was one of those few great innovators, he said. “These people are very rare.”

Mr. Dell’s early achievements were formidable, but unless his latest effort to turn around his company is successful, the Dell legacy today is very much in doubt. Last week, along with Silver Lake Partners, a private equity firm, he made a $24.4 billion buyout offer for his company — an apparent bet that, without the scrutiny of public shareholders, he can get Dell back on track.

Dell, the company, has been losing ground for years as the industry it once dominated has undergone upheavals that its founder failed to foresee. “The very nature of technology is that it changes a lot,” said Toni Sacconaghi, an analyst at Sanford C. Bernstein. “And Michael has conceded publicly that he has missed some big changes — he failed to foresee smartphones or tablets — and both of these shifts have been highly detrimental to the PC world.”

He has lagged in a crucial area of corporate strategy as well, said Shaw Wu, an analyst at Sterne Agee in San Francisco. While Mr. Dell has always been attuned to the needs of corporate clients, he is 20 years behind I.B.M. in embracing a strategic shift to enterprise software and services, Mr. Wu said: “That’s a higher-margin business that Dell would like to go after, but I.B.M. and others have got tremendous leads. It will be very difficult for him to catch up.”

If Dell shareholders accept an offer price of $13.65 a share, Mr. Dell, who is contributing his stake of more than 14 percent in the company plus hundreds of millions more, would end up with more than 50 percent of the new company’s equity, Mr. Sacconaghi estimated. Mr. Dell, who declined to comment for this article, would control the company without being subject to the day-to-day pressures of the stock market, which has pummeled Dell shares because its earnings have weakened.

While Dell reports that 50 percent of its revenue is directly related to PCs, Mr. Wu says the figure is 70 to 80 percent when indirect revenue, like that for computer monitors, printers and services, is included. “The company has made big investments in other areas, but it’s still mainly a PC company,” he said.

That’s a big problem for several reasons. Once considered the low-cost provider in the field, Dell now faces lean Asian competitors like Lenovo, Asus and Acer that make PCs more cheaply and accept lower profit margins. Yet these companies, particularly Lenovo, have also garnered praise for making excellent computers, not merely well-priced ones. At the same time, Dell’s vaunted reputation for quality and service has waned.

Lenovo, which makes the ThinkPad line of notebook computers formerly sold by I.B.M., “has been picking up corporate customers from Dell,” Mr. Wu said.

THEN there is a deeper issue: the entire PC industry is stagnant at best. Worldwide PC shipments declined 4.9 percent in the fourth quarter, versus the year-earlier period, according to Gartner, a market research firm. Consumer preferences are shifting. With the ubiquity of smartphones and tablets — segments where Dell is absent or very weak — consumers aren’t replacing PCs as often.

“We don’t expect people to abandon PCs, but they won’t rely on them as much in the future,” said Mikako Kitagawa, a Gartner analyst. Dell’s share of this no-growth market has been shrinking, to 10.2 percent worldwide in the fourth quarter of 2012, from 12.2 percent the previous year, Gartner said.

Facing such headwinds, Mr. Sacconaghi said, Dell hopes to “hold PC profits flat or, worst case, down 5 percent a year, while they grow the rest of the business to more than offset that.” But the market is skeptical. Dell’s shares fell 30 percent in the 12 months before Jan. 14, when reports of an imminent buyout appeared.

The leveraged buyout will layer $15 billion of new debt on the company. Microsoft, with which Dell has had close ties, is providing $2 billion. Because interest rates are extraordinarily low, servicing all that debt should be manageable, assuming that Dell maintains its current cash flow, Mr. Sacconaghi said.

It’s not clear how much the debt load will constrain Dell’s investments in research and development. Josh Lerner, a Harvard Business School professor, said a study for which he was a co-author found that after leveraged buyouts, most companies maintained their ability to innovate, largely by focusing research in “their core competencies.”

In other words, he said, “Dell might be able to prosper after a buyout; it would depend on how Michael Dell manages the company.”

Is the price being offered for the company fair? It’s often unwise to bet against company insiders, especially founders like Mr. Dell, who may be presumed to know their companies’ value better than outside investors.

Consider John W. Kluge, who took Metromedia private in 1984 in a $1.1 billion leveraged buyout. Mr. Kluge, Metromedia’s founder, promptly liquidated it, selling television stations (to Rupert Murdoch) and sundry assets like the Harlem Globetrotters and the Ice Capades. In the end, Mr. Kluge tripled his take — to the chagrin of many former shareholders.

Mr. Kluge, who died in 2010, wasn’t interested in preserving his company or revolutionizing an industry, however. He merely wanted to make money. “When we buy an asset, we look at it as a return on the investment,” he said in 1980.

For Mr. Dell, whose name is on the door, other factors may be in play. “Another chapter is still to be written,” Mr. Bresnahan said. Money will be part of it. So will the Dell legacy.

Article source: http://www.nytimes.com/2013/02/10/your-money/at-dell-a-gamble-on-a-legacy.html?partner=rss&emc=rss

DealBook Column: Two Ways for Banks to Win

There was a lot of back slapping at Morgan Stanley when Zynga went public on Friday. But it should hold the self-congratulatory applause.

Morgan Stanley scored the coveted position of lead underwriter for Zynga’s initial public offering. The offering was considered a lucrative win for the bank: it was paid more than $10 million for marketing and distributing shares of the new stock. In total, Zynga paid out $32.5 million in fees to its underwriters. They included a laundry list of other Wall Street heavyweights too, like Goldman Sachs (which took in about $8.7 million).

So far, however, Zynga’s stock appears to be a dud. Its shares, which were initially priced at $10 each on Friday morning, fell to $9.05 by the end of trading Monday.

But there were even bigger losers before Zynga’s shares began trading: some of Morgan Stanley’s wealthiest clients. The bank’s investment management group used a collection of 11 of its mutual funds to buy into pre-offering shares of Zynga in February, when it paid $14 a share on behalf of its investor clients. In total, Morgan Stanley invested $75 million of its clients’ money to buy about 5.3 million shares of Zynga. As of Monday, its clients had lost a third of their investment, or about $25 million on paper.

Morgan Stanley, which has been the top underwriter of hot technology I.P.O.’s, has often used client money to invest in pre-I.P.O. shares. Coincidentally or not, it has often later found a way to land a role as a lead underwriter. In that position, it reaps eight-figure windfalls for the firm.

Such investments raise a question that has long been whispered about but rarely asked aloud: Should investment banks seeking underwriting roles in I.P.O.’s be allowed to invest client money in prospective corporate clients ahead of a potential deal?

“I’m sure it doesn’t hurt when you’re doing the I.P.O. bake-off to be an investor,” said Steven N. Kaplan, a professor at the University of Chicago Booth School of Business.

Frank Partnoy, the director of the Center on Corporate and Securities Law at the University of San Diego and a longtime critic of Wall Street (and a former Morgan Stanley employee) has an even more skeptical view. “It’s another example of how the cash cow of I.P.O.’s creates corruption and self-dealing,” he said, adding that he takes “the corruption part as a given.”

He said that he was not so cynical as to believe that such investments were being directed by bankers or their chiefs, but that it represented a larger culture and ethos problem on Wall Street. “I doubt it’s orchestrated, but I think it’s endemic to large bank holding companies. From the top they think they have a Chinese wall. But it’s only three feet high.”

In fairness, pre-I.P.O. investments are just as often a success as they are a failure. Morgan invested client money in Groupon in January at a $4.7 billion valuation. The deal was a huge win. Groupon’s market valuation is now worth $14.2 billion. And who later led Groupon’s I.P.O.? Yep, Morgan Stanley. Its underwriting fee: $17.4 million.

Banks say that investments made on behalf of investor clients are completely separate from their investment banking divisions and would never be influenced by the prospect of I.P.O. fees and the stream of other fees that are typically generated from the relationship developed underwriting a public offering. (The underwriting is usually just the tip of the iceberg; a successful I.P.O. often means the lead banks get to underwrite secondary offerings and manage personal money on behalf the company’s executives.)

Mr. Kaplan acknowledged that such investments might represent a perceived conflict. “A mutual fund of a bank is only going to make the investment if they think it’s a good investment,” he said. He pointed out that investment managers were typically paid based on the performance of their funds, not on the take of the firm’s investment banking business. Still, he said, the banks “get inside information.” He added: “This asks the whole question of whether the banks should be broken up. It’s the Glass-Steagall question,” he added, referring to the 1933 act that split investment and commercial banking and was repealed in 1999.

Privately, bankers say that while there is supposed to be a clear Chinese wall and that they do not seek to influence other parts of the firms, the fact that a big bank has the ability to make an investment either itself or by introducing a prospective client to the asset management side of their business can help build a relationship with potential corporate clients. A spokesman for Morgan Stanley declined to comment on the issue.

In January, Goldman Sachs invested $450 million of its own money and about $1 billion from its overseas clients in Facebook ahead of the company’s planned I.P.O., which is expected to take place in the first half of 2012. It has long been speculated that the transaction will help Goldman’s chances of being selected to underwrite the offering.

Facebook is now valued at more than $100 billion — so Goldman and its clients appear to have made money on paper. Facebook is in the final throes of deciding on underwriters for its initial public offering, and Morgan Stanley, Goldman and JPMorgan Chase are all considered contenders for the top underwriting spot. Facebook is expected to pay more than $100 million in underwriting fees.

To be fair, in every case that I have found, banks like Morgan Stanley and Goldman properly disclosed their potential conflicts to the public. In Zynga’s prospectus, there is a section that clearly states that Morgan Stanley, through its mutual funds, had a stake in the company. Similarly, Morgan Stanley’s prospectuses for its mutual funds clearly say the firm may have other relationships with the companies that it invests in.

Nonetheless, as arm’s length as such investments may be, they raise questions among investors. “The disclosures just illustrate to me that they have bulletproofed themselves from lawsuits,” Mr. Partnoy said.

In February, JPMorgan raised a $1.2 billion fund, called the J.P. Morgan Digital Growth Fund, to invest in pre-I.P.O. shares of hot technology companies. While the idea for the fund came from the asset management division and the investment bank was not even told about it until after it became public, it was seen, perhaps unfairly, as a way for the bank to get closer to prospective corporate clients.

Representatives for Goldman Sachs and JPMorgan declined to comment.

“You could tell a positive story or you could tell a conflict story,” Mr. Kaplan said.

Article source: http://dealbook.nytimes.com/2011/12/19/two-ways-for-banks-to-win/?partner=rss&emc=rss