Saturday, April 6, 2013

Turning Around Computer Companies – HP and Dell: An Update


Turning Around Computer Companies – HP and Dell: An Update

It will be another six weeks before we get more financial results from struggling technology companies Dell and Hewlett Packard.  The results are to confirm the continuing decline of these businesses.  Meanwhile, the leadership for both companies remains in a state of flux.

At Hewlett Packard, the two directors targeted for dismissal by the proxy voting services and some institutional Investors, G. Kenneth Thompson and John H. Hammergren, have resigned.  And, Raymond J. Lane has given up his chairman’s seat in favor of Ralph Whitworth, the activist investor.  Mr. Whitworth will serve in that role until the company can find a new independent chairman.  All three directors barely survived the recent vote last month.  In order to clear the air, they decided to resign.
 
Out of the Box Products (2005)
While their resignations are a positive development, the big questions remain.  What are Meg Whitman and the board going to do to turn around HP?  Is there an operating strategy or new set of products that will reinvigorate the company?  I can’t say that I’ve seen much concrete evidence.

Shifting to Austin, Texas, Dell remains mired in the buyout process.  While Michael Dell and Blackstone are nudging closer together, there’s still a long way to go before a deal is consummated.   Blackstone is commencing detailed due diligence next week, for which they will be reimbursed by Dell.  Yes indeed, the only way that Blackstone would get involved in pursuing a potential transaction is if Dell paid their expenses.  So there’s a $25 million budget set aside for Blackstone and their advisors to rummage through Dell.  They’re going to discover that Dell suffers from many of the same diseases as HP.  While they’ll probably craft a plan that allows Dell to go private at around $15 per share with Mr. Dell at the helm, I’m not sure they’ll find a magic cure.

While we can’t be certain that Mr. Dell and/or Blackstone will succeed in acquiring Dell, we can be sure that the banks will be winners if there’s any kind of buyout.  Apparently, the banks will get about $60 million for providing advice to Dell and the special board committee and another $330 million for arranging the debt financing.  I’m not sure Wall Street has seen a payday like this since 2007-2008.  And just about every major bank, including BofA, Goldman Sachs, Barclays, Credit Suisse, Deutsche Bank, Morgan Stanley, and UBS has found a way to get in on this bonanza.

Although the computer industry remains under siege, this past week has demonstrated they there are some nice opportunities to feed on HP and Dell.  HP will looking for new directors, who will probably command $300,000 to $400,000 in cash and stock apiece to sit on the board a couple of committees.  Meanwhile, Dell is offering Blackstone a no cost look at their books, and the banks a huge payday.  Finance is still the place to be.


2 comments:

  1. Either company might survive as a provider of servers and to a lesser degree laptops, but it would be a classic cash-cow setup that requires ruthless cost-reduction and an ownership that cares about only the bottom line, not the top line.

    Both companies tried to enter the smartphone market and failed. I doubt either one will be successful in tablets.

    Both companies have also tried to become service-oriented companies, a/k/a/ system integrators. The grass is always greener on the other side of the fence. It's easy to get a little revenue from services, but it's hard to get a lot -- and it's also hard to establish a loyal customer base and a highly profitable service business. IBM made the transition, but very few companies do -- and IBM had great management and a great customer base at the start of the transition. Neither Dell nor HP can say that.

    I believe both Dell and HP will slowly dissolve.

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  2. Chuck
    IBM is the best, and almost only, example of a computer company that reinvented itself over a long period of time. When IBM tried to sell commodities (PCs) in the 1980s, they faltered. However, when they stuck to value added services for their clients, they more than got back on track.

    In fact, HP is a repository for declining tech companies -- CPQ being the best example.

    I think the strategy you're suggesting is how Dell/Blackstone will try to make a 20% return with leverage before returning the company to the public where it will wither. If the Dell deal is successful I wouldn't be surprised if HP isn't broken into a couple of pieces with some of those pieces being LBOed. In both cases there's more than enough cashflow for PE to engineer transactions.

    In the end, Carl Icahn might have it right. The best thing might be to withdraw all the cash from these businesses, rather than letting investment banks and PE dabble for the next 5 or 6 years.

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