Roy O pitching at Dell Diamond - Brendan Maloney-US PRESSWIRE
Thoughts on Dell Computer going private in a $24.4 billion deal
This has nothing to do with baseball, other than, I guess, that the Rangers' AAA affiliate plays at a field named after the company in question...
But the news has come out today that Michael Dell and private equity firm Silver Lake Partners are making a bid to take Dell Computers private in a deal worth $24.4 billion.
This is fascinating to me, in large part because I lived in Austin during the 1990s, and Dell Computer was, in the time I was there, the leading success story in the city, the leading light of the burgeoning Austin tech industry, and Michael Dell was a hero to all of us who questioned whether college was really worth it.
And there were also the legions of Dellionaries, the secretaries and mid-management types who were making middle class salaries but were worth seven figures, because they got in with Dell early, collected a lot of their compensation in the form of stock options, and watched the value of their options skyrocket.
One of the stories out there at the time -- which may be apocryphal -- was that Austin real estate agents kept a close eye on the price of Dell stock, because a significant jump in the stock price would result in a significant jump in house sales, because of Dellionaires cashing in some of their options so they could go and buy a house for cash.
The Dell folks were also notorious for keeping their 401(k)s mostly invested in Dell stock, arguing that Dell consistently outperformed the market, so why would they diversify when it would just mean losing money compared to if they kept everything in Dell?
Dell traded in the 40s and 50s around the turn of the millenium, and has been on a long, slow slide since then, including a 52 week low of 8.69 per share. The buyout price is $13.65 per share, a quarter of where Dell was at its peak. Dell has been floundering for a decade as the company has dealt with other companies copying its commoditization model, while Dell itself has struggled to extend its business model into other areas.
Part of Dell's success that I always found fascinating was that, like Wal-Mart, it was revolutionary in terms of its supply chain. This 2004 story talks about how, while other companies measure the amount of inventory they have in terms of days or weeks, Dell measured it in terms of hours -- meanwhile, it took payment immediately for computers it would then build and ship, while not having to pay its vendors for 36 days. That meant that, while other companies had a gap between the time they were paying vendors and getting paid by customers, Dell had the opposite -- and thus had the use of that money in the interim.
It will be interesting to see how this shakes out. A big tech company going private is highly unusual, largely for compensation reasons...part of the reason big private tech companies like Google and Facebook went public, when they didn't really need to, was because employees were sitting on stock and stock options that they couldn't trade on the public market. Going public allows those employees to finally cash in some of that stock. By going private, Dell will be in a position where it won't be able to grant options that can be publicly traded to its employees...but then, given how the stock has performed of late, that may not be that big of a blow.