THE WALL STREET
EARNINGS | Updated
February 19, 2013, 7:44 p.m. ET
Dell Profit Drops 31%
But Results Support View
That Buyout Plan Undervalues Firm
Dell Inc. disclosed steep profit and revenue declines Tuesday, but
the results were strong enough to bolster investors who say a plan to
take the computer maker private undervalues the company.
For the fiscal fourth
quarter ended Feb. 1, the company said profit fell 31% and revenue
11%. Still, the results were on the high end of the company's earlier
Timeline: Dell's Ups
From Public to Private
... and Back?
Read about corporate
founders who decided they would rather take their companies
Dell said two weeks ago
that it had accepted a buyout offer from founder and Chief Executive
Michael Dell and others. As a result, some shareholders were
suspicious that Mr. Dell and his team wouldn't be motivated to deliver
a strong quarter.
"In a management-led buyout
there are obvious conflicts of interest," said David Larcker, director
of the corporate governance research program at the Stanford Graduate
School of Business.
The quarter began while Mr.
Dell and his management team were negotiating with the computer
maker's board to take the company private. It ended just days before
the $24.4 billion deal, valued at $13.65 a share, was announced.
Dell executives declined to
discuss the pending buyout on a conference call with financial
analysts. Mr. Dell didn't participate on the call because of his
involvement in the deal. The company also declined to give
People who were involved in
the deal negotiations have said they anticipate shareholders will
accept the offer in large part because of the industry-wide decline in
PC sales. The final 2012 calendar quarter, which included the holiday
shopping season, was among the most disappointing ever for PC sales,
with world-wide shipments declining 4.9% from a year ago, according to
research firm Gartner.
Dell has been hit harder
than most competitors. In the Feb. 1 quarter, its revenue from PCs
fell 20% from a year earlier to $6.9 billion. The machines account for
48% of Dell's revenue.
For the last few years,
Dell has been tacking away from its reliance on PCs, building out a
portfolio of products and services that it can sell to businesses.
These include security software, storage systems, networking gear and
the like, all of which usually have higher profit margins than PCs.
Brian Gladden, Dell's chief
financial officer, said the company was moving forward with that
Dell Inc. on Tuesday
posted results that beat Wall Street's expectations, even as the
Texas company posted a double-digit drop in revenue from its PC
and mobility segments. MarketWatch's Dan Gallagher reports.
(Photo: Getty Images)
In the fourth quarter,
sales of the company's servers and networking gear climbed 18% to $2.6
billion. Sales in its storage business dropped 13% to $434 million,
while sales of services declined 3% to $2.1 billion.
Overall, Dell said net
income for the quarter totaled $530 million, or 30 cents a share, down
from $764 million, or 43 cents a share, a year earlier. Revenue was
$14.3 billion, down from $16 billion a year ago.
Dell on Feb. 5 agreed to a
buyout deal led by Mr. Dell, who owns around 14% of the company, and
Silver Lake Partners, a private equity firm. Mr. Dell first approached
the company's board about taking the company private over the summer,
and negotiations took place throughout the fourth quarter, according
to regulatory filings.
More than half of Dell's
unaffiliated shareholders will have to approve the deal. So far,
holders of about 15% of the shares have said they plan to oppose it,
including Southeastern Asset Management Inc., the company's largest
outside shareholder, which has said it thinks Dell's value is closer
to $24 per share.
A person familiar with
Southeastern's thinking said on Tuesday that the firm is focused on
the percentage of Dell's profits that come from software, storage
systems and other non-PC businesses.
Mr. Gladden said Tuesday
that the company's enterprise solutions and services business, which
houses many of these products, accounted for "well over half our gross
The person familiar with
Southeastern's thinking said this business and other more profitable
ones should command a higher multiple than PCs. If Dell were to
continue on its current path of fewer PC sales but more sales of
software, it could become a smaller but more valuable company, the
Mr. Dell's offer doesn't
factor this in. "They are shrewdly playing a hand dealt to them by the
PC market," the person said.
Management-led buyouts are
complicated because the management team has an incentive that isn't
necessarily aligned with shareholders' interests. "It casts everything
they do under the light of is this being done to their advantage,
whether it's true or not," said Charles Elson, director of the John L.
Weinberg Center for Corporate Governance at the University of
Nick Tompras, president of
Alpine Capital Research, which owned 2.2 million Dell shares as of
Dec. 31, was concerned that management might try to report a poor
quarter but was pleasantly surprised by the results.
Mr. Tompras, who is opposed
to the current offer, said the results give "shareholders a little bit
of a reason to argue for a higher price." He adds: "Why would the
founder of the company want to buy back the company if he was
pessimistic about its future?"
Dell shares were down a
cent at $13.80 in 4 p.m. trading on the
Nasdaq Stock Market and up about 1% after hours, when they traded
at 30 cents above the current offer price.
Ben Worthen at
A version of this article appeared Feb. 20, 2013, on page B2 in some
U.S. editions of The Wall Street Journal, with the headline: Dell
Earnings Drop Steeply.
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