THE WALL STREET JOURNAL.
| July 11, 2013, 7:59 p.m. ET
Building a Better Dell:
More R&D, Less PCs
Silver Lake is betting it and
company founder can restore the computing icon to its former luster.
If the Dell buyout closes,
what might a new Dell look like? Keep an eye on private-equity fund
Silver Lake, which says it is just as savvy in helping fix companies
as in buying them. Shira Ovide reports on digits. (Photo: AP)
Private-equity firm Silver Lake Partners may soon be
wagering $1.4 billion on a bet that many analysts think is sheer folly: To
restore computing icon
Dell Inc. to its former luster.
Silver Lake executives and founder
Michael Dell have been discussing turnaround plans for months, according
to people close to the group. One person familiar with the investor group's
thinking said they are "taking Michael's strategy, and cubing it."
So what exactly is that strategy? From what little
information is available, it likely will be a quicker and more ruthless
implementation of what Mr. Dell has unsuccessfully put forth as chief
executive so far: Boosting sales of back-office computing networks, storage
to keep and analyze data, software to protect information on employees'
smartphones from theft, and services to keep companies' technologies running
The group also plans to expand the company's roughly
$1.1 billion in annual spending on new product research-and-development,
where it now lags behind other tech companies, a person familiar with the
buyout group said. Dell's investment in research, development and
engineering was 2% of sales in the most recent fiscal year. At
EMC Corp. and
Hewlett-Packard Co., R&D took 11.8% and 2.8% of revenue, respectively.
It also wants to fix a sales force that Dell
insiders concede doesn't now do an adequate job selling anything other than
PCs and servers.
Another of the investment group's likely first big
decisions: a strategy for Android,
Google Inc.'s fast-growing software for mobile gadgets.
It isn't clear how Silver Lake and Mr. Dell will
implement their plans, nor whether they will need to significantly shrink
Dell's 110,000-person workforce to afford to invest in growth areas. Mr.
Dell has said the $57 billion in annual revenue company's market share in
fast-growing software and service products is less than 1%. Roughly
two-thirds of Dell's revenue is tied to selling PCs.
Lessons gleaned from past investments in Skype and
others suggest once Silver Lake fixes on a strategy, it moves quickly and
aggressively but not always successfully.
The buyout group has been dismissive of taking a
slash-and-burn approach at Dell if it completes the $24.4 billion deal,
according to people familiar with the matter.
Dell executives previously have identified $3.3
billion in potential cost cuts, but didn't specify how to implement them.
Dell's smaller scale recent cost-cutting efforts have been more than offset
by increased spending, Dell directors have said.
"The cleanup is going to be messy," said Brian
Marshall, an analyst with researcher ISI Group. "What they have to do in my
opinion is take a look at their cost structure…They could be a lot smaller."
Silver Lake, which was started in 1999 and manages
more than $23 billion in investor capital and assets, acquired majority
ownership of Skype in 2009 from
eBay Inc. Silver Lake quickly replaced 29 of the top 30 Skype senior
At Skype, Silver Lake recruited well-regarded
Cisco Systems Inc. executive Tony Bates as chief executive, people
familiar with the matter said, and pushed for new revenue, such as a version
for business videoconferencing and a kind of "click to call" advertising
that gave users a prompt to place a Skype call to a business.
Silver Lake doubled the size of Skype's product
development team in less than two years, the company said, and resolved a
dispute with the firm's founders that had threatened the company. Early on,
Silver Lake's team micromanaged Skype management to the point where it was
tough to complete projects, said a former Skype manager. A person familiar
with Silver Lake's position said Skype management set the terms of the stock
options, and that those terms were made clear to all employees.
About 18 months after Silver Lake bought 70% of
Skype, the firm agreed to sell it to
Microsoft Corp. for $8.5 billion, or a roughly $5 billion windfall for
Silver Lake and its investment partners.
Among its stumbles is telecom-gear company Avaya
Inc., which Silver Lake and others bought in 2007. It has struggled with
slipping sales and an onerous debt load. Silver Lake said its investments
since 2007 have an aggregate 20% annual growth rate.
People familiar with Silver Lake's approach
acknowledge it will be tricky to get Dell on solid footing. Many of the big
decisions will have immediate repercussions. Jumping on Android, for
instance, could affect its relationship with Microsoft, which is extending a
$2 billion loan for the buyout.
Mr. Dell is slated to control roughly 76% of Dell's
stock, and it is unclear how the two sides will resolve any disagreements.
Blackstone Group LP and two other private-equity firms believed the
potential reward of remodeling Dell wasn't worth the risk, according to
people briefed on those firms' discussions about Dell.
A person familiar with Blackstone decision said
executives there believed Dell's newer businesses selling software and
service to corporations, the likely heart of the company' growth strategy,
are too weak to develop into lasting businesses soon.
Odds have significantly improved for passage next
week of the $24.4 billion buyout, but it isn't done yet. Billionaire
Carl Icahn on Thursday said he plans to raise the potential price of an
alternative transaction he has pushed for Dell to stay public.
Write to Shira Ovide at
A version of this article
appeared July 12, 2013, on page B1 in the U.S. edition of The Wall Street
Journal, with the headline: Building A Better Dell May Take More R&D, Less
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