On Monday, Dell put all the rumours to bed and announced that it is to become a public company again. The question puzzling many analysts is why, and why now? Chris Middleton suggests four answers.
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‘Exit, pursued by a bear’ is the most famous stage direction in history, from Shakespeare’s A Winter’s Tale. But it is as good a description as any of Dell’s exit from Wall Street five years ago, pursued by analyst derision. But unlike in the play, Dell’s exit – it’s decision to go private – was not followed by an offstage death, but by a rebirth.
And now Dell is about to stride back into the spotlight again. The analysts’ cheering may be ironic this week, but that will soon be forgotten, because Dell is now back on the only stage that matters to a certain type of financier – brash, triumphalist: the New York stock market.
After months of rumours of a reverse merger with VMware, Dell Technologies announced late on Monday that it is to do the unexpected, but showy thing: become a public company again, five years after quitting Wall Street in high dudgeon.
The question, then, is why did this most traditional of PC, server, and storage players exit, and then decide to walk back into the spotlight in a rather different guise?
One answer is that what the FT has called “next-level financial engineering” has made Michael Dell and his investment partners, Silver Lake, a small fortune. He has turned a 14 percent stake in old, ‘back-end and desktop Dell’, worth roughly $3.5 billion, into a 72 percent interest in an enlarged tech conglomerate, worth $35 billion, according to Wealth News Today (based on an analysis of Dell’s own figures, released this week).
Another is that the CEO’s criticism of Wall Street’s “short termism” five years ago was correct: today’s American stock market measures success in financial quarters, rather than what cultural theorist Stewart Brand calls “the long now”.
And as digital culture has accelerated and our attention spans have attenuated, analysts increasingly obsess over daily peaks and troughs, extrapolating a big picture from tiny stock fluctuations. A dangerous obsession that has us all thinking in milliseconds, not millennia.
For any business that wants to engage in medium-term strategic renewal and refocusing, as Dell has done, this has the effect of trapping business leaders in analysts’ gaze. Stock analysts are the theatre critics of the financial world, their ‘buy’ recommendations the equivalent of “grab front row seats at this show”.
For any business engaged in risky manoeuvres, therefore, companies’ stock can be devalued just when they need financial support.
So Dell is now back onstage with a new message: “from the edge to the core to the cloud” – as opposed to “from the enterprise back end to your desktop” – and the Internet of Things, along with a portfolio of Dell’s own ‘edgy’ investments, is now at the centre of that strategic renewal.
In this sense, October’s Internet of Things division launch in New York was the fanfare that preceded Monday’s re-entry on Wall Street.
Shaking off the shackles
Another explanation for Dell’s return to the stage is what analyst Richard Waters describes thus: “The latest transaction is designed to get him out of a straitjacket created by his earlier dealmaking.”
In 2016, to take full control of EMC without having to sell off any of its stake in VMware, Dell’s board came up with what Waters claims was “an ingenious sleight of hand”.
“As part payment, it issued a tracking stock that was theoretically tied to the performance of its VMware stake — though owners of the new stock had no claim over Dell’s assets or VMware’s earnings,” he wrote in Wealth News Today. “That didn’t stop Dell suggesting that the tracking stock would have the same value as VMware’s separately traded common stock, which came with full rights.”
In the event, the tracking stock fell behind, and has been more than 40 per cent lower for most of its life, as Waters observed. “But for Mr Dell, it was a case of mission accomplished: based on the lowly value of the tracking shares, his cash-and-stock purchase of EMC had really only cost $58.5 billion, and not the headline value of $67 billion that was touted.”
Back in the limelight in July 2018, Michael Dell now emerges as something of a magician, whose biggest ‘trick’ – in non-pejorative terms – was performed offstage.
The CEO’s version
So what does Dell itself say of the decision to walk off, change the business, and walk back to stunned applause?
The official explanation of what has happened came from CFO, Tom Sweet: “Dell Technologies is proposing to exchange each share of its Class V common stock for 1.3665 shares of Dell Technologies Class C common stock, or $109 in cash, which is subject to an aggregate cash consideration not exceeding $9 billion.
“As a result of this exchange, Dell Technologies plans to directly list its Class C common stock on the New York Stock Exchange. The cash consideration per share offer represents a 29 percent premium to the Class V share stock price immediately prior to announcement.
“In connection with the transaction, and following Class V stockholder approval of the exchange, VMware plans to pay a special dividend of approximately $11 billion of excess balance sheet cash, of which $9 billion will go to Dell Technologies, with the remaining approximately $2 billion to VMware Class A shareholders.”
In short, here’s a dividend and let’s say no more about it.
But the important commentary came from Michael Dell himself, who offered a fourth explanation for ‘why public, and why now?’
After crediting the traditional parts of his business – PC, servers, storage – with performing well, and lauding the EMC/VMware acquisition, the CEO said, “Like our customers, we have had to transform for a new digital era. The world of business and technology is merging in a fourth Industrial Revolution, enabled by a perfect storm of technology tipping points.
“Edge computing and the Internet of Things, ubiquitous connectivity through broadband and 5G, along with AI and machine learning, have come together to transform the way we use data. And when this is done right, data becomes the basic building block of every organisation and the most valuable asset, perhaps even more valuable than products and services.
“And as the amount of data continues to explode, it’s driving an acceleration in IT spending, as IT departments face the dual priorities of investing in cloud-native applications for the future, while also optimising the traditional applications and infrastructure.
“Dell Technologies is well-positioned to capture an outsized portion of this spend, given the breadth of our innovation across our entire family of businesses.”
So there you have it: it’s not about financial engineering or turning boos into cheers, it’s about data, the common thread that draws all of a diverse business together, he said.
But while it clearly is about financial engineering, an offstage change of clothes, brilliant sleight of hand, and shaking off the shackles, the subtext of all those manoeuvres was transforming the business for a different age – with the help of some extra cash. In this sense, Dell is – as its CEO said – like many of its customers.
The Dell that emerges back into the spotlight today is a markedly different business. Michael Dell said that his company can now offer “secure, integrated solutions that span from the intelligent edge to the multi-cloud ecosystem and enable the software revolution of AI and machine learning”.
He continued, “We support applications across the multi-cloud ecosystem through solutions from VMware, Pivotal, Virtustream, and Boomi. We can help customers with IT transformation by modernising their data centres with Dell EMC and VMware. And we’re addressing workforce transformation through our Dell client business and VMware’s end-user computing offerings.
“And we surround all of this with intelligent, business-driven security from RSA, SecureWorks, and NSX. And it’s all supported by our global services that span the entire Dell Technologies portfolio and our flexible consumption offerings from Dell Financial Services.”
So for Dell it’s perhaps now a case of ‘enter, pursued by a bull’. Cue the applause. But now the critics can take over again, from their seats in the stalls.
Either way, there’s a lesson in here for the leaders of public companies: how easily can you transform a business when critics can close the show on opening night?
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