Although the full consequences of Dell's leveraged buyout (LBO) will take time to become clear, Adrian O’Connell, research director at Gartner, lays out some of the key impacts of the LBO in the research note, “Dell’s Leveraged Buyout Necessitates Scenario Planning for Customers”.
Mr. O’Connell answered some questions around the outlook for Dell and how it could evolve:
Q – How could the LBO impact Dell’s position in the client computing business?
A - We believe Dell wants to remain in the client computing business. The involvement of Microsoft in the LBO may also point toward renewed joint efforts in areas where the two companies have struggled before; namely, tablets and smartphones.
Dell has been strategizing to reinvent itself as an enterprise solution provider. A perception still remains of Dell being a "PC" company, and in fiscal 3Q13, mobility and desktop PCs still accounted for around 49 percent of Dell's total revenue. Dell's PC business is important to the organization because it generates a lot of revenue and cash flow. Low margins mean that the PC business is not enough to sustain or grow the overall company.
Although Dell has stated in its public filings that the end-user computing/PC business "continues to be an important element of our strategy," these areas should be viewed with a degree of caution. PC customers have no need for near-term (at least for 2013) action, but will need to monitor the situation for danger signs, such as delayed deliveries, incomplete or improperly fulfilled orders or lack of account team responsiveness.
PC customers should carefully monitor these and other factors, and establish alternative plans with other suppliers if the need arises. Ensure contract language enables OEM switch without penalty, so that an alternative plan can be initiated. Although the PC business is likely to remain important to Dell in the near term, the low-margin consumer PC business could be more at risk. This area has the greatest competitive cannibalization challenges.
Q - Beyond the short term, what impact will the LBO have on rationalization, renovation and repositioning of product/service offerings and/or divestments, particularly in low margin areas?
A - Details on specific plans are scant but, in all cases, enterprises should make sure they are aware of current, planned and contracted performance levels with specific timelines for deliverables, and regularly review these with their Dell representatives. Dell has a lot of work to do; clients' need to know how this will impact their ongoing operations and determine whether long-term engagement with Dell is viable.
Q – What is the outlook for the outcome of the LBO.
The broad strategy of evolving to more of an enterprise solution provider will remain intact. The question of timing, though, will be an increasing variable. The LBO may see Dell accelerate some of the rationalization processes. The areas that Gartner identifies as being of most strategic importance to Dell, and so those likely to see the most investment, are security, infrastructure software, networking, storage and servers and service coverage and capabilities.
The areas that are most at risk are those with low margins, such as consumer PCs, and those with the most overlap.
The journey to become an enterprise supplier does not inherently mean a lack of focus on the client computing side of the business. Although some areas, such as consumer PCs, could see a withdrawal, the presence of Microsoft as a key investor could indicate a renewed push into areas such as tablets and smartphones.
Users should design scenarios using a number of factors including, but not limited to, the size of their investment in the given technology area, the amount of overlap within Dell's portfolio, the level of commoditization and margin profile of the technology area, and time frames considered for the investment.
Additional information on Gartner’s take on Dell’s LBO can be found in the research note “Dell’s Leveraged Buyout Necessitates Scenario Planning for Customers”. on Gartner’s website at http://www.gartner.com/resId=2339419.
Gartner, Inc. (NYSE: IT) is the world's leading information technology research and advisory company. Gartner delivers the technology-related insight necessary for its clients to make the right decisions, every day. From CIOs and senior information technology (IT) leaders in corporations and government agencies, to business leaders in high-tech and telecom enterprises and professional services firms, to supply chain professionals, digital marketing professionals and technology investors, Gartner is the valuable partner to clients in more than 10,000 distinct enterprises. Gartner works with clients to research, analyze and interpret the business of IT within the context of their individual roles. Gartner is headquartered in Stamford, Connecticut, U.S.A., and has almost 9,000 associates, including 1,900 research analysts and consultants, operating in more than 90 countries. For more information, visit www.gartner.com.
Comments or opinions expressed on this blog are those of the individual contributors only, and do not necessarily represent the views of Gartner, Inc. or its management. Readers may copy and redistribute blog postings on other blogs, or otherwise for private, non-commercial or journalistic purposes. This content may not be used for any other purposes in any other formats or media. The content on this blog is provided on an "as-is" basis. Gartner shall not be liable for any damages whatsoever arising out of the content or use of this blog.