Dell to continue drive to enterprise with buy-out

Dell is likely to curb the consumer portion of its client business

Free from the bright lights of Wall Street, Dell's decision to go private is likely to lead to the company downplaying if not entirely eliminating consumer products in favor of building out its enterprise product portfolio, analysts said.

Dell has announced a buy-out agreement in which Michael Dell and equity investor Silver Lake will acquire the PC maker for $US24.4 billion. The transaction includes a $US2 billion loan from Microsoft and debt financing commitments from Bank of America, Merrill Lynch, Barclays, Credit Suisse and RBC Capital Markets.

Dell in recent years has tried to transform itself from a low-margin PC vendor to an enterprise IT provider offering servers, storage, networking, software and services. Since 2007, Dell has acquired 25 companies to beef up its enterprise product portfolio, but has had trouble bundling the new offerings into a cohesive product strategy.

Dell's strategy to develop end-to-end IT products for the enterprise will likely remain intact, and it can now pursue that goal without the pressure of delivering steadily increasing quarterly profits to Wall Street or answering investors, analysts said. Dell has had to make adjustments that slowed progress toward its long-term goals, but now the company can withstand a few rough financial quarters to develop its strategy, analysts said.

The big change could come in the PC division, where it may exit the low-margin consumer PC and device market and instead focus on enterprise PCs and mobile devices that fit a bring-your-own-device to work (BYOD) strategy, analysts said. Microsoft's loan puts pressure on Dell to remain in the PC business in some fashion, and client devices are also an important way to attract and retain enterprise customers, analysts said.

Dell has been largely profitable, and share prices do not accurately reflect the company's success in recent years, said Charles King, principal analyst at Pund-IT. There won't be a huge change in Dell's product line, and the company will continue to execute on its strategy to deliver more enterprise products, King said.

Database appliance

King highlighted the company's SAP HANA in-memory database appliance, which was introduced last week. The company will likely continue to blend hardware and software offerings together into enterprise offerings in an effort to broaden its product portfolio.

Dell will also keep PCs as part of the product mix for enterprises, and there could tablet and smartphone products in the future, King said.

IBM, Hewlett-Packard and Oracle also package software, hardware and services as part of integrated services offerings. But Dell will likely differentiate itself by tuning its offerings to the midmarket, said Ezra Gottheil, senior analyst at Technology Business Research.

"The midmarket makes a lot of sense and it's a market ... that's valuable," Gottheil said. "That's a solid business."

Dell won't be like IBM, which offers specialized products to high-end customers and also has a large consulting service. With respect to its acquisition and buy-out strategy, Dell is in a better position than HP, which made questionable acquisitions and went through a failed attempt to separate the PC business from main operations, Gottheil said.

There will a larger Dell investment in data-center capabilities to extend the PowerEdge server brand, said Matthew Eastwood, group vice president and general manager of IDC's Enterprise Platform Group.

"I could see Dell exiting the consumer market, about 20 percent of their revenues, and perhaps printing as well," Eastwood said, adding that the PC business adds little to the bottom line and dilutes Dell's margins.

But the company will continue to offer client products geared toward health care and education and other vertical markets, Eastwood said.

Dell will likely continue to acquire companies to expand its product portfolio, analysts said. Dell has successfully integrated EqualLogic, Boomi, SecureWorks and Perot Systems into daily operations, though there have been questions surrounding the integration of software assets it acquired. The company intends to unite its disparate software assets under the umbrella of Quest Software, which was acquired last year for $2.4 billion and was hailed as being the centerpiece of Dell's software strategy. Dell is also stepping up its focus on cloud and virtualization.

The decision to go private, however, also carries risks related to products and the company's ability to meet its debt obligations, analysts said.

"A leveraged buy-out is utterly dependent upon the company generating significant cash to pay off a crushing debt load. In a hypercompetitive market and during a recession, the lenders must have great deal of confidence that Dell can pay them back," said Anthony Sabino, a professor at St. John's University's Peter J. Tobin College of Business, in an email.

Until the dust of the buyout settles, there will be questions about Dell's product strategy and the impact on the company's customers, said Carter Lusher, chief IT analyst at Ovum, in a research note.

Companies should assess the risk involved and "put in place plans should Dell's radical hardware, software, and services shifts require changes to procurement plans," Lusher said.

"While the company might come out of this transition stronger with a product lineup that better meets the needs of businesses and public sector organizations, there will be uncertainty as to what products and services stay, get strengthen, or get eliminated," Lusher said.

Dell shares, meanwhile closed at $US13.42 Tuesday, up by $US0.15.

Agam Shah covers PCs, tablets, servers, chips and semiconductors for IDG News Service. Follow Agam on Twitter at @agamsh. Agam's e-mail address is agam_shah@idg.com

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Agam Shah

IDG News Service
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