Michael Dell and the big turnaround

The technology world is brutal. Companies that have been enormously successful in riding one tech wave often find themselves ground to the dust when a new wave comes along. The history of the global information technology industry is littered with the graves of once great companies that failed to keep up with changing times.

Dell Computers is one of the survivors that rode the original IBM-compatible PC wave and managed to successfully reinvent itself when that market became a low-margin commodity play. IBM sold off its PC division long ago when it realised it could not run it profitably. Compaq, one the biggest players in IBM-compatible PCs, could not keep up with rivals, was acquired by HP and eventually died as a brand. But Dell, which seemed to be heading the same way in 2005-06 went private, reinvented itself and came back stronger than ever.

Moreover, it was Michael Dell, the person who had created the original model, who saw the writing on the wall and turned around the company after taking it private in partnership with the private equity technology investor Silver Lake. Much later, after making the dramatic changes he wanted, Mr Dell would again take the company public. It is primarily this journey that is the focus of Play Nice But Win.

How he created Dell Computers from his university dorm and swept the PC market with low-cost, customised machines sold directly to customers is recounted in the entrepreneur’s first book —Direct From Dell.  Some bits of his early journey are also recounted in the new book but that is really not its focus.  And though the title of the book makes it appear that the volume is primarily about management lessons, it is far more of a recounting of the tumultuous journey that Dell undertook. There are details of the deal negotiations, the highs and the lows, the unexpected hurdles and the burden of taking the right and fair decision for investors who had put faith in Dell Computers.

In 2004, Mr Dell had given up his CEO role in Dell Computers but remained as the chairman. Though the company was still doing very well, its fortunes would turn sharply downwards within a year. Some of its competitors had become smarter and had matched its supply chain innovations. The desktop market — where Dell enjoyed an advantage because of its made-to-order products — had given way to laptops that were in more or less standardised configurations. More importantly, the PC game itself had become low margin and cut throat. Between 2005 and 2006, Dell Computers revenues, profits and share price were all in trouble. Mr Dell came back in 2007 as CEO and was hit almost immediately by the global financial meltdown of 2008.

The company had started changing course already earlier — moving into network peripherals and other stuff — but it had not realised how much customer needs had changed. Customers wanted end-to-end IT solutions and though Dell Computers had started on that path by acquiring a number of companies, it was still over-reliant on its bread and butter business of PC sales.

This was around the time that at least two different people talked to Mr Dell about why it made sense for the company to go private and he started exploring the idea seriously. The biggest advantage of going private was that it would allow him a free hand to undertake the changes he wanted, without having to deal with the expectations of shareholders as he needed to do because the company was listed in the stock markets.

There were two private equity players initially who showed major interest in helping him. One was KKR — Kravis, Kohlberg and Roberts —  which had made a big name of itself because of its leverage buyouts of big companies. The other was the technology investment firm Silver Lake, which had a deep understanding of the technology landscape and had a portfolio full of high performing tech companies.

Having two suitors was good for Mr Dell. Unfortunately, as the PC market fortunes got worse and the financial meltdown dragged on, KKR dropped out. Silver Lake made an offer but it was abysmally low in the opinion of the board and Mr Dell himself.

Meanwhile, the legendary financier, activist shareholder and corporate raider Carl Icahn got interested in Dell Computers. The pressure from Mr Icahn was exactly the headache that Mr Dell didn’t want but had to deal with. The book is filled with details of the backroom negotiations and the many problems Mr Dell had to deal with.

After going private, Mr Dell could speed up the transformation of Dell Computers into the full-fledged infrastructure company it is today. The company made more acquisitions — big ones including EMC — to give itself the kind of width and depth it needed to offer the full solutions to clients. When it was time to go public again, Mr Dell had to contend with the Icahn factor once more.

The book is interesting for the details it contains of all the deals and the negotiations and provides a glimpse of the mental toughness of Michael Dell.

The reviewer is former editor of Business Today and Businessworld, and founder of Prosaicview, an editorial consultancy