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com
7
DELL INC (A)—
GOING PRIVATE
This case was prepared by Charles W. L. Hill of the
School of Business, University of Washington, Seattle.

C7-1 INTRODUCTION (see Exhibit 1). The company was also phenomenally
pro table. Between the mid-1990s and 2007, Dell’s
average return on invested capital (ROIC) was a stag-
The rise of Dell Inc. is the stuff of business legend. gering 48.3%, making it by far the best-performing
Founded by Michael Dell in 1984 when he was still an enterprise in the industry. From 2007 onwards, how-
undergraduate at the University of Texas, Dell grew ever, Dell faced increasing headwinds. By 2013, its
to become the largest personal computer manufac- global market share had fallen to 11.6%, putting it
turer in the world. At its peak in 2005, the company behind Hewlett Packard and Lenovo. The company’s
accounted for 16.8% of all PC shipments globally nancial situation had also deteriorated. In 2011, Dell

Exhibit 1 Global Market Share of PC Manufacturers, 2004–2014(%)

25

20
Global Share %

15

10

0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Acer Dell Hewlett Packard Lenovo

Source: Constructed by the author from multiple Gartner Press Reports.

C-90
 Case 7 Dell Inc (A)—Going Private C-91

Exhibit 2 PC Unit Shipments Globally, 1996–2014 (Millions)

400
350
300
Millions

250
200
150
100
50
0

Source: Constructed by the author from multiple Gartner Press Reports.

generated net income of $3.5 billion on revenues of Underlying the decline in Dell’s performance was a
$62 billion. In 2012, net income fell to $2.4 billion, seismic shift in the personal computer industry. After
revenues declined to $56.9 billion, and Dell’s ROIC growing robustly for two decades, PC sales plateaued
had contracted to 14.9%, less than half of where it in 2010–2012, and then fell signi cantly in 2013 (see
was in the mid-2000s. The company’s stock price Exhibit 2). From 2010 onward, consumer spending
closed out 2012 at $10 a share, down from an all-time migrated away from PCs and toward smartphones
high of $42 at the end of 2004. and tablets (see Exhibit 3). To compound matters,

Exhibit 3 Global Shipments of Digital Devices 2010–2015 (Millions)

2500

2000
Millions

1500

1000

500

0
2010 2011 2012 2013 2014 2015

PC Tablets Smartphones

Source: Constructed by the author from multiple Gartner and IDC Press Reports.
C-92 Case 7 Dell Inc (A)—Going Private

low-cost producers such as Lenovo of China and Acer wasn’t Dell’s rst business. Like many entrepreneurs,
of Taiwan, were taking business from Dell in the mar- he started early. When he was 12, he set up a busi-
ket for Windows PCs. At the high end of the market, ness selling the stamps that he and his friends had
a resurgent Apple was capturing an increasing share collected. He quickly made $2,000. At 16, he got a
of desktop and laptop computers with its stylishly de- summer job selling newspaper subscriptions for the
signed iMac offerings. By late 2014, Apple’s share of Houston Post. Not satis ed with calling people at
global PC shipments had risen to over 6%, while its random, he developed a methodology for identify-
share of the US market stood at a record 13.4%.1 ing who was most likely to pay for a new subscription
Dell was also struggling in the corporate market, using publicly available data on mortgage applica-
where companies like IBM and Hewlett Packard (HP) tions. He targeted those people, creating personalized
were gaining business by bundling together computer letters and offering subscriptions. His income that
hardware with value-added information technology year was $18,000—not bad for a high school student
(IT) service offerings. IBM and HP offered hardware, in 1981. When he got his driver’s license, he bought
including PCs and servers, at cost, and made money himself a BMW.5
from multiyear service contracts that could encom- Computers, however, were Dell’s passion. Dell’s
pass everything from basic maintenance to premium rst was an Apple II. Much to the horror of his par-
IT consulting services. In 2008, HP strengthened its ents, as soon as he got his brand-new machine he
position by acquiring for $13.9 billion the IT consult- took it apart to see how it was made. When the IBM
ing company Electronic Data Systems. Dell lacked a PC was introduced in 1981, he bought one of those.
big consulting arm, which put the company at a clear He opened it up, added all of the enhancements he
disadvantage. To try and rectify this, after 22 years could, and sold it for a tidy pro t. And so a business
with no acquisitions, in 2007 Dell started to acquire was born. Dell quickly noticed an interesting fact.
small IT service companies.2 In 2009, Dell made its While an IBM PC sold for about $3,000, the com-
largest acquisition ever, purchasing Perot Systems for ponents were made by other companies and could
$3.9 billion.3 Perot Systems was a provider of informa- be purchased off the shelf for around $700. So what
tion technology services with a strong position in the accounted for the other $2,300? Sales and marketing
market for electronic health-care information. Michael expenses, IBM’s pro t margin, and the markup taken
Dell’s strategy was clear: to move the company up- by retailers. To Dell, this screamed pro t opportunity.
stream into higher-value-added IT consulting services. He realized that by selling direct, something that he
This strategy, however, could take years to execute. was already doing, he could eliminate the retailer’s
Investors were not impressed, focusing instead on Dell’s markup, price lower, and still make a nice pro t.
inability to offer attractive smartphones and tablets, By early 1984, Dell was selling $50,000 to $80,000 a
and the increasing commoditization of the company’s month worth of upgraded PCs and add-on compo-
PC business. By 2012, Dell was feeling the heat from nents to people in the Austin area. In May of that
the slowdown in global PC sales. Revenues and prof- year, he incorporated the rapidly growing business as
its were down, the stock price was slumping, and in- Dell Computer Corporation. He soon dropped out of
vestors were grumbling about the company’s inability school to concentrate full time on building the busi-
to decouple itself from the commodity PC business. ness. As he described it later, the original facility was a
Michael Dell’s response was to take the company private. 1,000-square-foot of ce space in Austin. Dell’s manu-
facturing “consisted of three guys with screwdrivers
sitting at six-foot tables upgrading machine.”

C7-2 ESTABLISHMENT
OF DELL C7-3 THE GROWTH YEARS
In 1983, a young Michael Dell was conducting a Dell was riding a wave of demand for PCs. The mar-
lucrative business selling upgraded PCs out of his ket had transitioned from an embryonic one and was
dormitory room at the University of Texas.4 This now experiencing hypergrowth. Penetration into the
 Case 7 Dell Inc (A)—Going Private C-93

business and consumer segments was proceeding to its suppliers. This information allowed the players
rapidly. By selling direct, eliminating middlemen, in Dell’s globally dispersed supply chain to optimize
and using the savings to price aggressively, Dell was their production and shipping schedules so that parts
able to ramp up sales. By late 1986, the company was arrived at one of Dell’s assembly plants just in time.
doing $60 million in annualized sales. In 1988, Dell By the late 1990s, Dell was turning over its inventory
went public. Michael Dell was just 23. The 1990s, in a matter of days, reducing its working capital re-
however, were the beginning of a magic decade for quirements to a minimum.
the company. In 1990, Dell was ranked 25th in the Internet-based customer ordering and procure-
world among computer companies. By 1999, it was ment systems allowed Dell to synchronize demand
the largest PC maker in the United States, and the and supply to an extent that its rivals could not.
second largest globally. Moreover, 17 out of the top For example, if Dell found out that it was run-
25 computer companies in 1990 no longer existed by ning out of a particular component, say 17-inch
1999. Dell had ridden to the top of a highly dynamic monitors from Panasonic, it could manipulate de-
and turbulent industry, while many more venerable mand by offering a 19-inch model at a lower price
enterprises had failed. IBM, the dominant computer until Panasonic delivered more 17-inch monitors.
enterprise of the 1970s and 1980s, had a near death By taking steps to ne-tune the balance between
experience in the early 1990s, recording larger losses demand and supply, Dell could meet customers’ ex-
than any other company in history, while Dell went pectations and maintain its differential advantage.
from strength to strength. Moreover, balancing supply and demand allowed
One of Dell’s greatest strengths was the fact that it the company to minimize excess and obsolete in-
built to order. It did not have to stuff a channel with ventory. By the early 2000s, Dell was writing off be-
inventory. It did not have to make educated guesses tween 0.05 to 0.1% of total material costs as excess
about demand. It did not have to worry that it might or obsolete inventory. Its competitors were writing
have built too few of a certain model and too many of off between 2 to 3%, which gave Dell a signi cant
another. It only built what it had already sold. cost advantage.
The rocket fuel that propelled Dell to the top of By the late 1990s, Dell was starting to work some
the industry was the Internet. The development of nancial magic. It could take an order over the Inter-
hypertext transfer protocol by Tim Berners-Lee gave net, build the machine, and ship it to customers in a
birth to the World Wide Web. The subsequent intro- matter of days. The customer was billed when the ma-
duction of web browsers democratized the Internet, chine shipped. Its suppliers, however, were paid net
transforming it from a haven for computer nerds into 30 days. The implication; Dell could use money des-
a mainstream communications network. This enabled tined for its suppliers to nance its working capital
Dell to start direct selling over the Internet. requirements, including its inventory. This reduced
Launched in June 1994, by 2010 more than 85% the need for outside capital: You don’t need to borrow
of Dell’s computers were sold online. According to capital from a bank, or from investors, when you can
Michael Dell: “As I saw it, the Internet offered a logi- borrow at a zero interest rate from your own suppli-
cal extension of the direct (selling) model, creating ers. This means that you can pair down the amount of
even stronger relationships with our customers. The working capital on your balance sheet, thus reducing
Internet would augment conventional telephone, fax, the denominator for ROIC (de ned as net pro t over
and face-to-face encounters, and give our customers capital on the enterprise’s balance sheet). This boosts
the information they wanted faster, cheaper, and more the pro tability of the enterprise.
ef ciently.” Customers could now build their own By the late 1990s, Dell was earning an ROIC in the
machine online, add the mix of components that best 40% range, a remarkable level of pro tability by any
suited them, enter their credit card information, and measure. Moreover, the high ROIC was not a short-
then hit the purchase button. In effect, the Internet term phenomenon. Dell continued to earn these kind
allowed Dell to almost perfectly segment the market, of returns on its invested capital until 2007. Equally
creating value for customers in the process. impressive, Dell grew both sales and earnings per
Moreover, Dell could take the real-time order ow share at double-digit rates for most of this time as it
and transfer it at the speed of light via the Internet surged to the top of the industry.
C-94 Case 7 Dell Inc (A)—Going Private

Dell was by no means the only company that pur- computers. The long tail of small companies re-
sued a direct-sales strategy—Gateway was another– ects relatively low startup costs for entering the
but it was the rst, and it was the best at doing business. The standard architecture of the personal
it. Dell was operationally ef cient. Michael Dell computer means that key components—such as an
avoided founder’s disease, a well-known phenom- Intel compatible microprocessor, a Windows operat-
enon that occurs when entrepreneurs sink the busi- ing system, memory chips, a hard drive, and other
nesses they created by failing to professionalize similar hardware—can be purchased on the open
management and delegate responsibility. Dell hired market. Assembly is easy, requiring little capital
skilled operators, and learned how to delegate to equipment and few technical skills, and economies
them. The company built core skills in managing the of scale in production are moderate. Although small
direct-sales model and coordinating a globally dis- entrants lack the brand-name recognition and distri-
persed supply chain. bution reach of the market share leaders, they sur-
Dell’s main rivals during the period of rapid vive in the industry by pricing their machines a few
market growth included Compaq, IBM, Hewlett hundred dollars below market leaders and capturing
Packard, Packard Bell, and Toshiba. Issues arising the demand of price-sensitive consumers. This puts
from channel con ict made it hard for these com- pressure on brand-name companies and the prices
panies to imitate Dell’s model. All of these com- they can charge.
panies had already committed to selling through a Most buyers view the product offerings of differ-
channel, and fully embracing a direct-sales model ent branded companies as very close substitutes for
might well have led to a loss of sales through their each other, so competition between them often de-
existing channel. faults to price. Due to a combination of competition
and technological improvements, the average selling
price of a PC fell from around $1,700 in 1999 to un-
der $750 by 2010. The downward pressure on prices
C7-4 THE GLOBAL PC makes it hard for personal computer companies to
INDUSTRY bring in big gross margins, and results in lower pro t-
ability. The exception is Apple, which has successfully
differentiated its iMac offerings by design, operating
The global personal computer industry is very system software, and brand.
competitive.6 At the end of 2014, Lenovo was mar- Slowing demand growth in many developed
ket leader with a global share of 19.4%, followed nations, including the world’s largest market the
by Hewlett Packard with 18.8% and Dell Inc. with United States, where the market is now mature and
12.7%. Apple had 6% of the market, although in the demand is limited to replacement demand, has ex-
United States its share was 13.4% (among U.S. con- acerbated the downward pressure on prices. There
sumers, Apple’s market share is thought to be much is also a pronounced cyclical aspect to demand
higher, coming in at over 30%). from businesses. Demand growth was just 4% in
There was consolidation in the industry during the 2009, for example, due to a global recession, but it
2000s. Hewlett Packard acquired the large PC vendor jumped to 14% in 2010 as the economy recovered.
Compaq in 2002. Lenovo, the fast-growing Chinese The rise of powerful substitutes in the form of tab-
rm, acquired IBM’s ThinkPad consumer PC busi- lets and smartphones has depressed demand since
ness in 2005. In 2014, Lenovo entered into a deal to 2010 (see Exhibits 2 and 3).
buy part of IBM’s server business. Meanwhile, in late Personal computer companies have long had to
2014 HP announced plans to split into two compa- deal with two very powerful suppliers—Microsoft,
nies, HP Inc. and HP Enterprise. HP Inc would sell which supplies the industry standard operating sys-
PCs and printers, while HP Enterprise would focus tem, Windows, and Intel, the supplier of the industry
on providing software and services to corporations. standard microprocessor. Microsoft and Intel have
A long tail of small companies accounts for some been able to charge relatively high prices for their
35% of the global market. Some of these companies fo- products, which has raised input costs for per-
cus on local markets and make unbranded “white box” sonal computer manufacturers, and reduced their
 Case 7 Dell Inc (A)—Going Private C-95

pro tability. In late 2012 Microsoft introduced a new Each plant uses exactly the same supply chain
version of its Windows operating system, Windows 8. management processes that have made Dell famously
Windows 8 featured a different user interface that the ef cient. Taking advantage of its supply chain man-
one consumers had grown used to. It was not well agement software, Dell schedules production of every
received by many consumers and businesses. Some line in every factory around the world every 2 hours.
industry observers believe that the poor reception Every factory is run with no more than a few hours
for Windows 8 hurt demand for PCs, as many people of inventory on hand, including work in progress.
decided not to upgrade, instead sticking with their To serve Dell’s global factories, many of Dell’s larg-
Windows 7 machines. est suppliers have also located their facilities close
From the early 1990s onwards, servers became an to Dell’s manufacturing plants so that they can bet-
increasingly important part of the PC business. Servers ter meet the company’s demands for just-in-time
are specialized PCs that sit at the heart of corporate inventory.
networks, and can be used to store data and serve Dell has set up customer service centers in each re-
up applications such as email to a network of con- gion to handle phone and online orders and to provide
nected PCs. Client server architecture was the domi- technical assistance. In general, each center serves an
nant computing paradigm in enterprises both large entire region, which Dell has found to be more ef -
and small for most of the 1990s through to the pres- cient than locating a customer service center in each
ent day. By 2014, severs were accounting for about country where the company does business. Dell has
$50 billion in annual sales industry wide. The three experimented with outsourcing some of its customer
largest server vendors were HP, IBM and Dell, which service functions for English language customers to
had 27%, 18.5% and 17.7% of this market respectively call centers in India. Although the move helped the
in the third quarter of 2014. Cisco was fourth in the company to lower costs, it also led to dissatisfaction
market with a 6.2% share.7 from customers, particularly in the United States,
who could not always follow the directions given over
the phone from someone with a thick regional accent.
Subsequently, Dell moved its call centers for English
C7-5 DELL’S GLOBAL language businesses back to the United States and the
OPERATIONS United Kingdom. Dell continues to invest in Indian
call centers for its retail customers.

The PC market is a global one. Dell has been expand-

ing its presence outside of the United States since the
early-1990s. By 2010, over 40% of Dell’s revenue was
C7-6 GOING PRIVATE
generated outside of the United States. Dell does not
alter its business model from country to country—it Michael Dell had stepped down as CEO in March
uses the same direct selling and supply chain model 2004 to devote more time to his family’s charitable
that worked so well in the United States. foundation and personal investments. He passed the
Dell’s basic approach to global expansion has been reins to Kevin Rollins, who had been chief operating
to serve foreign markets from a handful of regional of cer, and whom Michael Dell credited with trans-
manufacturing facilities, each established as a wholly forming Dell into an ef cient manufacturer. Dell
owned subsidiary. To support its global business, it op- remained on as chairman. In January 2007, Rollins
erates 3 nal assembly facilities in the United States, resigned and Michael Dell came back as CEO.
1 in Brazil (serving South America), Poland (serving The catalyst for Rollins resignation was Dell’s de-
Europe), Malaysia (serving Southeast Asia), China clining market share in the PC industry (see Exhibit 1).
(serving China), and India. Each of these plants is large After 10 years of strong performance, in 2006 Dell
enough to attain signi cant economies of scale. When lost its leadership position to HP, and the com-
demand in a region gets large enough, Dell considers pany’s growth rate fell below that of the industry. A
opening a second plant—thus it has 3 plants in the compounding factor was that in 2006 the Securities
United States to serve North America and 3 in Asia. and Exchange Commission (SEC) announced that it
C-96 Case 7 Dell Inc (A)—Going Private

was investigating Dell for possible accounting regu- offerings, including installing and maintaining IT
larities. Rollins’s resignation was seen my many as an hardware, installing and customizing software appli-
attempt to de ect attention away from Michael Dell. cations such as ERP and database offerings, applica-
According to the SEC, Dell received some $6 billion tion development, business process outsourcing, and
in “exclusivity payments” from Intel to use only Intel business process analysis. Steve Shuckenbrock was
microprocessors. The SEC asserted that these hired from the IT consulting services company EDS
payments, which were not disclosed to investors, had a to lead the initiative. His task was to establish Dell as
material impact on Dell’s performance between 2001 a viable competitor to IBM and HP. Both of these
and 2005, allowing the company to meet or exceed companies were pursuing a razor and blade strategy,
analysts’ earnings expectations. When the payments pricing commoditized hardware at close to cost, and
from Intel were cut, this negatively impacted Dell’s then making money from multiyear service contracts.
pro tability, but again the company did not disclose Dell aimed to do the same.
the reason for falling pro ts to investors. In 2010, Dell To build up its services business, Dell made some
Inc. agreed to pay a $100-million penalty to settle the 20 acquisitions for a total of $13 billion. These in-
charges. Dell and Rollins both paid a $4-million ne.8 cluded the 2009 acquisition of Perot Systems for
As he stepped back into the CEO position, $3.9 billion, the largest in the company’s history. The
Michael Dell was confronted with a number of prob- price that Dell paid for Perot Systems represented a
lems, which only intensi ed over the next 6 years. 68% premium over the company’s prior market value.
Dell’s rivals had become more ef cient, eroding the Commenting on the acquisition binge, Dell noted:
cost advantage that Dell once enjoyed. Moreover, “At the scale of Dell, the only way you are going to
the growth rate in the PC market was slowing. The move the needle quicker was acquisitions.”10
market plateaued in 2010–2012, and in 2013 it shrank By the nancial year ending February 1, 2013,
(Exhibit 2). This triggered intense price competition. “services” was a $12-billion revenue business at Dell.
To compound matters, the rise of smartphones and In the same year, Dell made $45 billion in revenues
tablets left traditional PC companies like Dell out in from hardware products (mostly PCs and servers).
the cold (see Exhibit 3). Dell’s net income 2013 was $2.37 billion, down
Dell did enter both the smartphone and the tab- from $3.49 billion a year earlier. While services were
let markets. A mobility group was established within growing the top line, this was not yet translating
Dell, and Ron Garriques, who joined Dell from into bottom line growth. Investors were clearly not
Motorola, was appointed to lead the unit. The division satis ed with the lack of progress at Dell. The com-
released a number of products, but they were not well pany’s stock price, which had been trading around
received.9 A “pocket tablet” running Android with a $25 when Michael Dell reassumed the CEO role
5-inch screen, known as “The Streak,” was released in in early 2007, was trading below $10 a share in
August 2010. It was a year behind schedule and ran on mid-2012. It was against this background that, in
an old version of Android. Streak it did not. It really February 2013, Dell announced that he had part-
had no chance against the runaway success of Apple’s nered with private equity fund Silver Lake to take
iPad, which had been released in January of that year. Dell private in a $25-billion deal.
The mobile division also released a smartphone that Michael Dell rst contemplated taking Dell private
used the Windows Phone 7 operating system. The in mid-2012, after a conversation with Southeastern
phone had battery and Wi-Fi problems. It did not sell Asset Management, the company’s second biggest
well. In November 2010, Garriques resigned from the shareholder. Southern Asset Management was under-
company, and Dell shut its mobile division down, roll- water on its investment in Dell and saw little upside.
ing its mobile products into the broader business. The However, the investment company said that it would
company continued to make Android smartphones be willing to back an effort to take the company pri-
until 2012, when it pulled out of the business, citing vate if the price were right. This started a chain of
low sales and large investment requirements. events that culminated with Dell and partners from
Michael Dell also pushed the company into the Silver Lake, and another investment rm, Kohlberg
information technology services business. The service Kravis and Roberts (KKR), talking about a possible
business encompassed a number of different product private buyout of Dell.
 Case 7 Dell Inc (A)—Going Private C-97

At this point, Dell informed the board of direc- now have to vote on the deal. Under the terms of the
tors about his conversations. The board formed a agreement, Dell stockholders were to receive $13.65
special committee from which Dell was excluded to in cash for every share of Dell they held—a transac-
consider the idea along with other options. Report- tion that valued the company at $24.4 billion.11 The
edly these other options included (1) splitting Dell up offer price represented a premium of 25% over the
into a PC business and a services business; (2) making closing share price of $10.88 on January 11, the last
more “transformative” acquisitions; (3) increasing day before rumors of a possible private equity buy-
the dividend payout and stock buybacks to boost out started to appear in the media, and a premium of
the share price; and (4) selling Dell to a “strategic 37% over the average closing share price during the
buyer”. The board then told Michael Dell that it was previous 90 calendar days ending on January 11,
open to considering a transaction that would take 2013. The buyers would acquire all of the outstand-
Dell private. ing shares of Dell not held by Michael Dell and
By October 2012, KKR had submitted bids for certain other members of management. The buyout
Dell at around $12 a share. Michael Dell had pledged deal included a 45-day “go-shop” provision during
that he would participate with whichever sponsor was which the special committee would actively solicit,
willing to pay the highest price. At the time the stock receive, evaluate, and potentially enter in to negotia-
price was around $10 a share. Then the November tions with parties offering alternative proposals.
earnings report came out. Earnings came in below To nance the deal, Silver Lake put up $1.4 bil-
management forecasts, and the stock price fell below lion in cash, and Michael Dell committed another
$9 a share. At this point KKR, citing structural weak- $750 million in cash, along with his existing 14% stake
ness in the PC business, withdrew from the bidding in the company. A consortium of banks, including
process. Bank of America, Credit Suisse, and RBC provided
On December 6, 2012, the CFO provided updates loans totaling $13.75 billion. Microsoft added an-
on Dell’s business and gave the board of directors other $2 billion in loans. Dell was to remain CEO of
projections through until 2016. He told the board the company after privatization. Without the need to
that fully implementing the plan to shift from PCs to pay out dividends and make stock buybacks, Michael
a service business would take another 3 to 5 years. It Dell and Silver Lake felt that they could adequately
would also require more capital investment. This was cover the interest payments on the debt from cash
a big concern, given that cash ows from the PC busi- ow. Moreover, privatization would give management
ness were declining. The board asked another private the exibility to pursue longer-term investments.
equity rm, Texas Paci c Group, if it was interested
in bidding for Dell, but the company declined.
By early February 2013, the board had come to
C7-6a Enter Carl Icahn
the conclusion that a private buyout of Dell was prob- At this point, Carl Icahn entered the eld. Icahn had
ably the best option. With rumors of a buyout start- rst made his name during the 1980s as an activist
ing to appear in the media, the board needed to make investor. He had specialized in taking a substantial
a statement. They had come to the conclusion that a or controlling position in companies that he claimed
buyout would inject needed capital into the company. were poorly managed, and pushing for changes in
It would also take the company out of the glare of the management and strategy. He would make money
public markets, enabling management to make long- from selling out after the stock price had made sub-
term investments that could in the short run depress stantial gains.
earnings. Convinced that there would be no other bid- One of the high points of Icahn’s career was the
ders, the board gave Michael Dell and Silver Lake the takeover of the venerable airline, TWA. TWA was
go ahead to make a formal offer to take Dell Inc. pri- in nancial trouble. Icahn raised debt capital from a
vate. Dell recused himself from all board discussions group of investors to nance the takeover. To sway
and board voting on any transaction. TWA’s board, management, and employees, he told
On February 5, the board announced that it had them he wanted to make TWA pro table again. He
reached an agreement with Silver Lake and Michael ended up with a 20% stake in the company and the
Dell to take the company private. Shareholders would chairman’s position. After the takeover, he sold off
C-98 Case 7 Dell Inc (A)—Going Private

some of the company’s assets in order to pay down originally offered in February. It was not a big con-
the debt. In 1988, Icahn took TWA private in a lever- cession. Dell’s board backed the revised offer. Icahn
aged buyout, which gave him a pro t of $469 million pushed for shareholders to seek “appraisal rights,”
from selling his personal 20% stake. The buyout left which is a process by which a judge determines the
TWA with $540 million in debt. Icahn paid down the value of the shares. Appraisal rights are available to
debt by selling off TWA’s prized London routes to companies like Dell that are incorporated in Delaware,
American Airlines for $445 million in 1991. but it is a process that can take months. There are also
Stripped of its most valuable routes, a year later risks involved because while judge might rule that
the airline went into Chapter 11 bankruptcy proceed- Dell was worth more than $13.65 a share, the judge
ings. Icahn resigned as chairman but remained in- could also rule that it was worth less.
volved in TWA, this time as a creditor. TWA emerged Dell’s board scheduled a vote to approve the buy-
from bankruptcy in 1993. As part of the restructur- out offer to be held on September 12, 2013. Within
ing, TWA owed Carl Icahn $180 million. Desperate to 15 minutes the meeting was over. With roughly 65%
get rid of Icahn, TWA’s new management cut a deal of the votes cast for the transaction, Icahn lacked
that allowed him to buy any ticket that connected suf cient support to derail the buyout. Initially Icahn
through TWA’s St. Louis hub for 55 cents, and then continued to push for his own Dell shares to be ap-
resell it at a discounted price. The deal blocked Icahn praised by a Delaware judge, but on October 4, he an-
from selling through travel agents, but it didn’t men- nounced that he was withdrawing his request.14 Icahn
tion a rapidly emerging new distribution channel, the was left with a small (for him) $70-million pro t on his
Internet. Icahn set up Lowestfare.com to resell TWA Dell investments, but he wasn’t beyond taking one last
tickets. Icahn put downward pressure on the amount swipe at the company. Icahn stated that his attempt to
TWA could sell tickets for, because the company was block the buyout was “too dif cult” given the lack of
essentially competing with itself. Estimates suggest progress with the board, which he likened to a “dicta-
that the deal cost TWA $100 million a year. In 1995, torship.” Icahn complained that the board would just
TWA went bankrupt.12 not listen to his arguments. He needed better corporate
Icahn reportedly got interested in Dell after some governance in U.S. companies, he stated.15
large investors contacted him. In a March 5 letter to
Dell’s board, Icahn let it be known that he had qui-
etly purchased $1 billion in Dell shares, and that he
thought the Dell-Silver lake bid was too low. Privately,
C7-7 AFTERMATH
Icahn reportedly believed that Dell was worth $20 a
share. In June 2013, Icahn purchased another $1 bil- The transaction to take Dell private closed on
lion in shares from Southeastern Asset Management October 28, 2013. The nal value of the transaction was
at $13.52 a share, giving him a 9% stake in Dell Inc. $24.8 billion. A year later, Michael Dell told attend-
Icahn did not pull any punches; he barraged investors ees at an Inc. 5000 conference that his company was
with messages that the deal undervalued Dell, often “quite a bit” more pro table than it had been a year
using Twitter to communicate. He stated emphatically ago, without offering any speci cs, and 60% of its
that Michael Dell’s strategy was a failure, and that he business came from PCs. Despite some media reports
should be red and the board should be replaced. He at the time of the Dell buyout speculating that the
painted a picture of Dell’s board as being beholden company might get into mobile, Dell didn’t sound
to Michael Dell and lacking independence. Icahn interested in that. Asked to respond to the criticism
urged shareholders to vote against the buyout. Icahn that Dell “missed the boat” on mobile, Dell shrugged.
and Southeastern Asset Management proposed to re- “Enormous sums are being lost” in that sector, he said.
place Dell’s board with their own slate of directors, “Every three years, the leader of the mobile space has
who would then push the company into buying back changed. I guess all those guys missed it, too.”16
1.1 billion shares at $14 each.13 In an open letter published in the Wall Street
Michael Dell and Silver Lake responded to Icahn Journal on November 25, 2014, Michael Dell again
by boosting their bid to $13.75 a share, plus a 13-cent asserted that the buyout was the right move. He
special dividend, up from the $13.65 a share they had noted that: “Shareholders increasingly demanded
 Case 7 Dell Inc (A)—Going Private C-99

short-term results to drive returns; innovation and No more having a small group of vocal investors
investment too often suffered as a result. Share- hijack the public perception of our strategy while
holder and customer interests decoupled … As a we’re fully focused on building for the future. No
private company, Dell now has the freedom to take more trade-offs between what’s best for a short-
a long-term view … No more pulling R&D and term return and what’s best for the long-term
growth investments to make in-quarter numbers. success of our customers.” 17

NOTES
1
K. Hodgkins, “Apple grabs 7
“Gartner says worldwide server Airline,” Business Insider, March 18,
record US market share on strong shipments grew 1% in the third 2014.
Mac sales in Q3 2014,” MacRumors, quarter of 2014,” Gartner press re- 13
J. de La Merced, “Icahn’s
November 7, 2014. lease, December 3, 2014. Latest Gamble at Dell: Appraisal
2
A. Vance, “Dell Trails Its 8
Security and Exchange Com- Rights,” New York Times, July 10,
Rivals in the Worst of Times,” New mission, “SEC charges Dell and 2013.
York Times, December 15, 2008. senior executives with disclosure 14
M. J. de La Merced, “Icahn
3
S, Hansell and A. Vance, “Dell and accounting fraud,” SEC press Gives Up Fight Over Dell
to Spend $3.9 Billion to Acquire release, July 22, 2010. Appraisal Rights,” New York
Perot Systems,” New York Times, 9
E. Sherman, “Dell Mobile Is Times, October 4, 2013.
September 21, 2009. Gone, a Victim of Incompetence,” 15
D. Sandholm, “Carl Icahn
4
The historical material in this CBS Money Watch, November 18, Slams Dell Board After Drop-
section is drawn from Michael 2010. ping Fight,” CNBC, September 9,
Dell’s autobiography. M. Dell 10
C. Guglielmo, “Dell Of cially 2013.
and C. Fredman (1999) Direct Goes Private: Inside the Nasti- 16
J. Fine, “Michael Dell on Carl
from Dell. New York, NY. Harper est Tech Buyout Ever,” Forbes, Icahn, Hewlett Packard, and the
Business. October 30, 2013. Entrepreneurs He Most Admires,”
5
Dell.M and Fredman, C. (1999) 11
Dell Inc Press release, “Dell Inc, October 17, 2014.
Direct from Dell. New York, NY. Enters into an Agreement to Be 17
D. H. Kass, “Michael Dell
Harper Business. Acquired by Michael Dell and on Privatization One Year Later:
6
Source: T. W. Smith, Standard & Silver Lake,” February 5, 2013. “We Got It Right,” The Var Guy,
Poor’s Industry Surveys, Computers: 12
J. D’Onfro. “Marc Andressen: November 25, 2014.
Hardware, April 21, 2011. Carl Icahn Killed an Entire
 Tono Balaguer/holbox/Shutterstock.com
8
DELL INC (B)—
TRANSFORMING
THE COMPANY
This case was prepared by Charles W. L. Hill of the
School of Business, University of Washington, Seattle.

When Michael Dell took Dell Inc. private in The “public cloud” refers to on demand comput-
October 2013, he stated that the primary motivation ing services offered by third-party providers over the
was to allow the company to shift its strategy and bear public Internet. Amazon, Microsoft, and Google have
the costs of doing so out of the glare of the public been major bene ciaries of the shift to cloud comput-
markets. Investors in public stock markets, according ing. These corporations all offer the ability for custom-
to Dell, were too focused on short-term results, which ers to store, process, and analyze data on massive server
constrained his ability to make long-term investments farms located “in the cloud” and accessed through
that would take 5 to 10 years to bear fruit. high-speed Internet connections. Public clouds can
save companies from the substantial costs of hav-
ing to purchase, manage, and maintain on-premises
C8-1 DELL MOVES ON EMC hardware and application infrastructure. Public cloud
services can also be deployed faster than on-premises
infrastructure. A company relying on a public cloud
In late 2015, it became clear how bold Michael Dell’s can rapidly scale up (or down) its computing resources.
vision for restructuring his company was. Rumors This has proved to be crucial for high-growth organi-
emerged that Dell was in talks to merge the company zations such as Net ix, which uses Amazon’s public
with EM.C the world’s largest maker of hardware cloud. Similarly, the hit online game Fortnite has
for storing data. Much like Dell in its PC and server been able to grow its user base rapidly to 150 million
businesses, EMC was facing intense competition in its because it relies upon public cloud providers. One big
primary storage hardware business from commodity constraint on the growth of public clouds has been a
producers in Asia. The price competition in the server concern over data security. For regulatory and safety
and storage hardware businesses was also being inten- reasons, many enterprises have continued to keep sen-
si ed by weaker demand for traditional server and data sitive customer data on their on-premises data centers.
storage solutions as businesses and other institutions The hardware that public cloud providers use in
moved more of their computing requirements from their server farms is frequently custom designed. They
on-premises data centers onto the “public cloud.” either build it themselves or farm out assembly to low

C-100
 Case 8 Dell Inc (B)—Transforming the Company C-101

cost operators in Asia. In short, due to the growth of substantially increased utilization levels for servers,
the public cloud, enterprises are not buying as much which means that an enterprise needs far fewer of
hardware equipment from Dell and EMC. Of course, them than would otherwise be the case, substantially
there is still demand for Dell and EMC equipment reducing IT costs. Moreover, since its introduction
in “on-premises” data centers, but this is no longer in the early 2000s, virtualization has expanded from
viewed as a growth business. pure server virtualization to virtualization of storage
In October 2015, Michael Dell formally an- and networking resources, virtual machine manage-
nounced that Dell and EMC would merge. The ment, and load balancing. VMware software helps
merger, valued at $67 billion, was the largest in the corporations to manage all of these tasks, again
history of the technology industry. The merger added decreasing costs and increasing capacity utilization
EMC’s broad line of data storage hardware to Dell’s and the availability of computer resources. Once an
sever and client PC businesses. One core idea be- enterprise is locked into a particular vendor for these
hind the merger was to sell computing, storage, and tasks, such as VMware, high switching costs associ-
networking equipment as an easy-to-install bundle, ated with implementing a new system make it dif-
which would be attractive to corporations and public cult for rivals to gain business.
institutions with on-premises data centers. The belief The server virtualization market has been growing
was that the broad product mix would enable Dell rapidly since its inception. VMware has been the ma-
to gain share from key rivals in this space, including jor bene ciary. However, with 80% of servers based
IBM and Hewlett Packard. The deal would involve on Intel processors virtualized in 2016, the market
taking EMC private and require some $40 billion in becoming saturated. VMware also has rivals, most
debt nancing to buy out EMC’s public shareholders. notably Microsoft, which has its own virtualization
software, Hyper-V. Hyper-V has been able to gain
market share due to an attractive price point and
the fact that it is embedded in Microsoft’s Windows
C8-2 VMWARE, THE JEWEL Server operating system software. This has helped
IN EMC’S CROWN with adoption by small and medium-sized organiza-
tions where virtualization rates are lower. According
to research by Gartner, virtualization rates among
Along with EMC, Dell would also gain control over smaller companies with less than $3 million annual
VMware. VMware was 80% owned by EMC, with IT budgets was only 55% in 2016.
the remaining 20% being traded in the public mar- Another potential threat to VMware’s business
kets. Many observers viewed VMware as the jewel in has been the rapid growth of public clouds. While
the crown at EMC. Estimates suggested that while VMware offers its own platform for managing both
VMware’s share of EMC’s revenues was around public and private (on-premises) clouds, the major
35%, it accounted for 50% of EMC’s market value. public cloud providers such as Amazon, Microsoft,
VMware is the market leader in server virtualization and Google have developed their own platforms that
software for on-premises enterprise data centers. In incorporates virtualization software to achieve ef -
2016, VMware had more than 60% of the market cient workload balancing and optimal capacity uti-
in virtualization data centers. On-premises data cen- lization. This reduces the hardware requirements for
ters comprise large numbers of networked servers running a public cloud and lowers the costs of cloud
where enterprises store data and run applications. computing services. Indeed, without virtualization
For example, banks store customer account data and software the economics of cloud computing would be
process transactions on their data centers. In server nowhere near as compelling.
virtualization, an enterprise uses software such as In addition to VMware, EMC also owned a num-
VMware to disaggregate the physical hardware from ber of other interesting software companies includ-
the operating system and share those hardware re- ing the cybersecurity rm RSA Security and Pivotal
sources across multiple “tenant operating systems” Software. Pivotal specializes in making software that
such as Windows and Linux. The key bene t is enables customers to seamlessly manage data and
C-102 Case 8 Dell Inc (B)—Transforming the Company

applications which are stored both on their private The tracking stock, which has been trading under
data centers and on a public cloud infrastructure the symbol DVMT, has traded in close correlation
managed by the likes of Amazon and Microsoft. This with VMware’s own stock.
is a potentially valuable business. Regulatory and se- The complex merger deal was completed in
curity considerations mean that some customers do September 2016, nearly a year after the merger an-
not want to put all of their sensitive data on a pub- nouncement. The combined company was renamed
lic cloud, and instead may be required to or prefer Dell Technologies. At that time, the demand for
to keep some of it on private servers located on their Dell and EMC’s legacy products was continuing
own premises (that is, on a private cloud). For such to shrink. According to the research rm IDC, PC
customers, software that bridges the gap between pri- shipments fell by 10.4% in 2015 and 7.3% in 2016
vate and public clouds, and allows for seamless inter- as consumers shifted towards mobile devices. The
action between the two, is very valuable. Pivotal sees $64-billion market for servers, storage, and network
its competition as legacy providers such as IBM and hardware has been falling since 2014, and was pre-
Oracle, both of which have cloud offerings and are dicted to shrink by 1 to 2% per year through until
trying to help customers bridge the same gaps. 2020. While analysts expected the combined com-
pany to sell more of its traditional products, tak-
ing market share from rivals, it was clear that new
growth drivers were needed.
C8-3 STRUCTURING AND
CLOSING THE DEAL
C8-4 DELL’S EMERGING
When announced, the deal valued EMC at $33.15 a STRATEGY
share, a 28% premium over EMC’s closing price be-
fore news of the deal broke. While both EMC and
In an interview with a Forbes contributor in late
Michael Dell agreed to put up funds to help buy out
2017, Michael Dell was clear that he was taking the
EMC shareholders, Dell Inc. would have to absorb
long view: “In the short term, I really don’t care to
around $40 billion in new debt nancing to pay for
be honest. What I care about is the three, ve, ten and
the purchase. Several major investment banks, in-
twenty-year outcome.”1
cluding JPMorgan Chase & Co and Credit Suisse
Dell also made it clear that he saw VMware as
AG, agreed to initially put up funds to buy out EMC
crucial to the company’s future:
shareholders, with an aim of being paid back closer to
the time of the deal’s closing with the proceeds from Well, look, when you imagine forward in this
a mix of investment grade and junk bond sales. The world of multi-cloud, there is absolutely no ques-
plan called for Michael Dell and his associates to own tion that the answer isn’t public or private, it’s
about 70% of the combined company’s equity. He both. Then the idea is to layer in manage ser-
would continue as chairman and CEO of the com- vices and software as a service. And in that world
bined companies. the capabilities that VMware has are absolutely
VMware was to remain a publicly traded com- incredibly valuable to connect to all of the public
pany, trading under the symbol VMW, with the clouds. Then you can integrate the on-premise
combined Dell/EMC entity owning 81% of the eq- infrastructure, which we continue to see hav-
uity. As part of the deal, Dell decided to pay EMC ing a very important role. We’re having double-
shareholders partly in cash, and partly with a new digit growth in our server business. There’s a lot
tracking stock that at least on paper represented of infrastructure being laid down in private data
Dell’s controlling interest in VMware. By creat- centers all over the world. And when you think
ing the tracking stock, Dell was able to reduce the about future scenarios out to 2020 and beyond,
amount of debt it had to take on to purchase EMC. there is a boom in edge computing . . . VMware
 Case 8 Dell Inc (B)—Transforming the Company C-103

and Dell EMC go together like peanut butter and Dell is also strategizing that corporations will want to
chocolate . . . the more we do together, the more keep control of valuable data. An automaker, for ex-
we drive innovation.2 ample, will want the data from autonomous vehicles to
be stored on their own equipment, not on the public
Shortly after giving this interview, Michael Dell an- cloud where it may not be secure. In Dell’s vision, the
nounced another initiative—Dell Technologies would implementation of high-speed, fth-generation wireless
invest $1 billion over the next 3 years to create hardware networks scheduled for introduction in 2019 and beyond
and software that helps manage billions of everyday will make it much easier for the edge computing devices
devices connected to the Web. Dell is betting that there he envisages to communicate with each other, boosting
will be a boom in computing hardware and software demand for associated hardware, software and services.
that sits close to these devices; that is, in edge computing. Is he correct? Only time will tell.
Dell maintains that it will be cheaper and more ef cient As for nancial performance, the early results
to process information coming from sensors closer to from the postmerger entity were encouraging, sug-
where it originates (on the edge), rather than sending that gesting that the bundling strategy may be help-
data back to a public cloud (the center). An autonomous ing Dell drive sales growth. Net revenues for the
car or a robot surgeon, for example, needs to process 2017 nancial year, which ended February 2, 2018,
information in real time and won’t tolerate delays that were $78.7 billion, up from combined revenues
occur when processing information in a remote cloud. of $61.6 billion in the prior year (see Exhibit 1).

Exhibit 1 Dell Technologies Financial Performance

Successor
Fiscal Year Ended
February 2, 2018 February 3, 2017 (a) January 29, 2016 January 30, 2015
(in millions, except per share data)
Result of Operations and Cash Flow Data:
Net revenue $ 78,660 $ 61,642 $ 50,911 $ 54,142
Gross margin $ 20,054 $ 12,959 $ 8,387 $ 8,896
Operating loss $ (3,333) $ (3,252) $ (514) $ (316)
Loss from continuing opera- $ (5,688) $ (5,356) $ (1,286) $ (1,215)
tions before income taxes
Loss from continuing operations $ (3,855) $ (3,737) $ (1,168) $ (1,108)
Earnings (loss) per share attributable
to Dell Technologies Inc.:
Continuing operations-Class V $ 1.41 $ 1.44 $ — $ —
Common Stock-basic
Continuing operations-DHI $ (7.08) $ (8.52) $ (2.88) $ (2.74)
Group-basic

(continued )
C-104 Case 8 Dell Inc (B)—Transforming the Company

Exhibit 1 Dell Technologies Financial Performance (continued )

Continuing operations-Class V $ 1.39 $ 1.43 $ — $ —

Common Stock-diluted

Continuing operations-DHI $ (7.08) $ (8.52) $ (2.88) $ (2.74)

Group-diluted

Number of weighted-average shares outstanding:

Class V Common Stock-basic 203 207 — —

DHI Group-basic 567 470 405 404

Class V Common Stock- 203 217 — —

diluted

DHI Group-diluted 567 470 405 404

Net cash provided by $ 6,810 $ 2,309 $ 2,162 $ 2,551

operating activities

(a) The fiscal year ended February 3, 2017 included 53 weeks.

Source: Dell Technologies 2017 10K Report.

While the company was still losing money (operat- Dell Technologies does not own will continue to trade
ing losses were $3.7 billion in 2016 and $3.9 billion on the public markets, although there is speculation
in 2017), Dell Technologies was cash- ow positive, that Dell Technologies will ultimately acquire all of
generating $6.8 billion in cash ow in 2017, up from VMware.
$2.3 billion in 2016. That being said, the company According to news reports, Dell decided to go
did still carry a substantial debt burden in 2017 that public in order to simplify its capital structure and
amounted to $51.9 billion. It did have $13.9 billion give its private holders a publicly traded currency.
in cash and cash equivalents, up from $9.5 billion Going public in this manner does not require an
in scal 2016. initial public offering to raise capital. As a pub-
Perhaps re ecting the improved nancial position, licly traded company, Dell Technologies will still
on July 2, 2018, Dell announced that after spending carry a large debt load from the EMC acquisition,
5 years as a private entity, the company was plan- although as Michael Dell notes, Dell has been us-
ning to go public once more. The return to the public ing its positive cash ow to pay down that debt.
markets would involve yet another complex transac- Moody’s Investors Service currently rates Dell’s
tion. Dell is proposing to buy out the owners of the long-term debt as Ba1, or highly rated junk-grade
VMware tracking stock, DVMT, with a combination debt. Moody’s expects Dell to remain committed to
of cash and a newly issued “C” class of stock in Dell sizable debt reduction going forward. The extent to
itself. The new stock will trade on the New York Stock which interest payments on debt and debt reduc-
Exchange, making Dell a public company once more. tion payouts will constrain Dell’s strategic options
For the time being, the roughly 19% of VMware that is unclear.
 Case 8 Dell Inc (B)—Transforming the Company C-105

REFERENCES

D. Clark, D. Cimilluca, and R. with Dell EMC,” Forbes, Dell,” Forbes, April 20,
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Michael Dell,” The Wall lion Merger with EMC,” Debt Load Pushing It into
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2015. September 7, 2016. February 2, 2018.
B. Colello, “Dell Technologies R. King, “Dell Bets $1 Billion A. Pressman, “How Dell
to Discontinue Tracking on Internet of Things,” Technologies is Going Public
Stock,” Morningstar, July 2, The Wall Street Journal, Without an IPO,” Fortune,
2018. October 10, 2017. July 2, 2018.
Dell Technologies 2017 10K A. Konrad, “Cloud Company R. Waters, “How Michael Dell’s
Report. Pivotal Is Now Worth Financial Engineering Cre-
J. Furrier, “One Year Birthday $3.9 Billion After IPO ated a Fortune,” Financial
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NOTES
1
J. Furrier, “One Year Birthday Dell EMC,” Forbes, September 8, 2
Ibid.
of $67 Billion Mega Merger with 2017.