The decline of Dell and the buyback

Consumer PC manufacturer Dell announced last week that it would be buying itself back from its shareholders and becoming a private company. The firm’s founder and present CEO Michael Dell is planning to buy the company for $24.4 billion with assistance from Silver Lake, a private equity firm, and software giant Microsoft.

The news comes as the culmination of a long span of decline for the once-dominant company. In the last six years, Dell has slipped from being the largest PC manufacturer to the third largest, falling behind Lenovo and Hewlett Packard. This represents a significant blow, but it is far from the only or even the primary reason for Dell’s shaky performance over the last half decade.

Most of Dell’s problems have come from its inability to launch and maintain a successful mobile product. After years of increased consumer interest in smartphones following the release of Apple’s iPhone, that market’s profits have been claimed by only two companies: Apple itself, and Samsung. Industry stalwarts like HTC and LG have found themselves struggling to earn money selling phones. Dell’s situation is far more dire. While HTC, LG, Sony, Motorola (now a part of Google), and others have had trouble in the market, they have launched and maintained visible, reputable products that have attracted varying amounts of attention. No Dell product has achieved any kind of publicity, which could lead many to assume that they are simply uninterested in the smartphone market.

The company has, however, attempted to launch smartphones and other non-laptop mobile products. 2010’s Dell Streak, a five-inch Android device with a low-density display and an obviously cumbersome software skin, failed to generate any mass interest. The same year saw the announcement of the Venue Pro, a Windows Phone with a promisingly attractive design that, after numerous delays, was released with many severe technical issues. Its market failure was also spectacular.

What this shows is that the consumer electronics market is and has been in a period of deep disruption. Older companies that dominated the personal computer industry like Dell and HP have struggled to adapt to changing conditions because of their longtime dependence on certain core products (customizable PCs for Dell and printers and ink for HP) and, especially in HP’s case, unstable and unreliable management. Dell is hoping to use this buyback to reconfigure its operations and emerge as a hardware and software services company. IBM, whose PC business began a similar decline last decade, enacted a similar turnaround. Other companies in the same position, however, have not thrived to nearly the extent to which IBM has over the past eight years or so.

Complicating matters further for the embattled company is shareholder resistance. In a statement made to Canadian news company Reuters, investment officer Brian Rogers, whose company, T. Rowe Price own a significant percentage of Dell stocks, said, “We believe that the proposed buyout does not reflect the value of Dell, and we do not intend to support the offer as put forward.” Other shareholders have issued similar complaints.

Dell is entering a critical phase in its history. If it can enact an IBM-style turnaround will greatly depend on its ability to gracefully withdraw or reduce its presence in what have been its core markets. This is always a risky proposition, and in this fast-paced and disruption-prone industry, Dell is facing an uncertain future.