After weeks of rumors, Dell Inc. (NASDAQ:DELL) announced a plan to go private in a $24.4 billion buyout last month. Alongside founder/CEO Michael Dell, Silver Lake Management LLC will contribute equity to the leveraged buyout to be financed in part with a $2 billion loan from Microsoft Corporation (NASDAQ:MSFT).
The logic of the transaction is that Dell is in need of a significant transformation. The commoditized personal computer hardware business isn’t what it used to be, and the pioneer companies from the 90’s are feeling increasing pressure to grow against headwinds of tight margins, increasing adoption of mobile computing, and a loss of brand premium as Apple Inc. (NASDAQ:AAPL) and Samsung dominate product design and innovation.
According to Michael Dell, the solution to this problem is a complete renovation of the company, and to do that, investors will have to be willing to endure some quarterly financial pain. He contends that this is the type of pain that Wall Street doesn’t understand, and to embark on this transformation as a public company would be a distraction at best, and would at worst make Dell Inc. (NASDAQ:DELL) vulnerable.
Cynics abound of course, and the change in ownership is by no means a done deal. The opposition argues that the pricing is simply too low, but some even go so far as to imply that Michael Dell is nefariously buying back his own company on the cheap. There are very smart and very reasonable people on both sides (here and here, for example).
We won’t begin to touch that argument here, but skepticism does ask the question: What is Dell Inc. (NASDAQ:DELL)fundamentally trying to become? Of the computer industry stalwarts of the past, who is the most successful today, and how do their financials compare on a fundamental level to Dell today?
Wrong side of the railroad tracks – yesterday’s business model, today
Across the diversified computer systems’ sector are a range of players, all trying to do essentially the same thing as Dell. Some are farther along than others. First we’ll review Hewlett-Packard Company (NYSE:HPQ), a competitor that is in a very similar position to Dell.
Like Dell Inc. (NASDAQ:DELL), HP came to prominence selling computers and peripherals in the 1990s and 2000s. HP is slightly larger than Dell ($39 billion market cap versus $24 billion), but overall has similar fundamentals. Dell has a slightly better gross profit margin (24.3% vs. 23.6%), but cedes some of that back with slightly worse operating margins (5.4% for Dell vs. 7.9% for HP). They each have similar dividends as well, Dell paying out a dividend with a 2.3% forward yield versus 2.6% for HP.
Neither company is seeing increasing revenues (Dell declining 10.7% for the quarter year-over-year, while HP saw revenue decline 5.6%). And with the level of uncertainty for their business models and lackluster financial performance, the market trades Dell only at 2.28 times price to book, and 1.72 times price to book for HP.