Trading of the shares of Dell Computer briefly stopped this afternoon on news that the company is considering being acquired by private-equity firms. The company didn’t comment on the rumors.
No firms have stepped forward publicly to express interest. But Blackstone Group, one of the largest private-equity firms, is an obvious candidate. Last week, David Johnson, senior vice president for strategy at Dell, took a new post with Blackstone. And any deal is likely to be friendly and would include corporate founder Michael Dell. According to the most recent proxy filing, he owns about 14 percent of the company’s common shares. Private-equity veterans suggest that firms like Silver Lake Partners and TPG, which have long had a focus on technology firms, might also be interested.
This marks one of the few times that Dell’s stock has been in the news in recent years. And therein lies a tale of fragility and obsolescence that can be told in two tidy charts. Call it a tale of two decades.
Dell was a company custom-built for the go-go 1990s. Michael Dell pioneered a direct-sales model from his dorm room at the University of Texas and ultimately built it into an Internet powerhouse. In the 1990s, everybody bought PCs (PCs, not Macs) because they wanted to go online. The explosion of the Internet—email, website, audio, gaming, video—meant people were eager to upgrade their computers every couple of years. Which mean they bought more PCs (PCs, not Macs). And it became cool and simple to purchase desktops—and then laptops, printers, speakers, and other accessories—online through Dell. Because it had a head start in direct sales against incumbents Iike IBM and Hewlett-Packard, and because it worked like crazy on logistics and its supply chain, Dell was able to reduce prices and gain market share while also turning a profit.
The upshot. As the chart below shows, Dell was arguably the best-performing stock of the 1990s. Between January 1991 and March 2001, its shares rose a stunning 2,407 percent.
But Dell’s dominance wasn’t to last. Once everybody was online and the market was saturated, it was difficult to boost sales. Throughout the first decade of the 21st century, profit margins for computer makers continued to slip. IBM sold off its PC business to a Chinese competitor, Lenovo, in 2004. Gateway was sold to Acer in 2007. And then, seemingly out of nowhere, Apple stormed back to gain market share in desktops, laptops, and a whole new range of devices in which Dell didn’t really have serious offerings: iPods, iPhones, iPads. And so while Dell rolled out clever ads, and boosted its physical presence with mall kiosks, its position in the culture shrunk. So did the company’s margins. And so did the stock.
Check out this chart of Dell from March 2000 to the present, in which the stock lost nearly 80 percent of its value. The broader stock market has enjoyed two epic rallies, and new technology companies have sprung from the fertile ground of Silicon Valley. But Dell has wilted. In order to get investors to stick around, last year it resorted to that old-economy tactic: paying a quarterly dividend of eight cents a share.
Of course, the company is still profitable. In its most recently concluded fiscal year (PDF), Dell earned $3.5 billion on $62 billion in sales. In recent quarters, sales and profits have fallen, but it is still minting cash. The company has a lot of cash—nearly $11 billion (PDF)—and a manageable amount of debt. Its business may be declining and challenging, but it is not in danger of disappearing in the next few years. In fact, if rival H-P decides to do something dramatic and get out of the PC business, Dell could even pick up some market share. This combination of relatively low debt, profits, a profitable core business, lots of cash, and some easy cash-conservation measures (the company could save $570 million annually simply by eliminating its debt), make it a natural private-equity target.
Of course, Dell, even after it slump, remains a large company, with a market value of about $20 billion. That’s large for a private-equity firm to take on. But private-equity firms are sitting on lots of money, and the debt markets are still in a very forgiving mood. And as any aficionado of safari videos knows, it’s not uncommon for several lions to team up to take on a lumbering elephant.