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Dell, Inc. - Not Out Of The Woods Yet As Challenges Galore

 February 08, 2013 11:15 AM

(By Mani) Dell, Inc. (NASDAQ: DELL) may have struck a deal to sell itself to a consortium, including founder Michael Dell, for $24.4 billion, but it still has a lot of work to do given a plethora of challenges to face.

The first challenge lies in the form of PC business. Dell, the world's third largest PC maker, after Hewlett-Packard Company (NYSE: HPQ) and China's Lenovo Group, may wonder what to do with the business, which once was the cash cow for the Round Rock, Texas-based company.

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Dell had missed the opportunities with smartphones and tablets – both markets now being dominated by Apple, Inc. (NASDAQ: AAPL) and Samsung. Those devices are hurting sales of personal computers, which was once Dell's forte.

Here is where Microsoft Corporation (NASDAQ:MSFT) may come to the rescue. With its $2 billion loan, MSFT may want Dell to focus on tablets as the software giant looks for hardware partners to expand Windows' 8 base. But, a Dell tablet won't happen in the near-term.

Next, the most critical is Dell's debt load. The takeover would leave a company with a debt of over $15 billion. The interest paid on debt could hurt the cash position and profitability as they could be used for M&A in the software space, which could help position itself against industry leaders such as International Business Machines Corp. (NYSE:IBM), HP and Oracle Corporation (NASDAQ:ORCL). As of November 2, 2012, Dell had cash and cash equivalents of about $11 billion.

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Since Dell is exiting public market, it might find difficult to raise cash for acquisitions, and lower credit ratings make it harder to find cheap debt and increase financing costs. Fitch has cut Dell's long term issuer default rating to 'BB+' from 'A'. Moody's has downgraded its long term rating on Dell by two notches to 'Baa1' from 'A2,' while S&P has placed Dell on watch for a possible downgrade.

Now comes the software challenge. Since 2009, Dell has spent almost $12 billion in buying software firms such as Compellent Technologies, but it has not been able to bundle its software offerings with server products successfully.

Dell should focus more on cloud computing tools and target small and mid-cap companies managing servers and networking equipments – a multi-billion market dominated by giants such as IBM and VMware, Inc. (NYSE:VMW).

To date, Dell's cloud offering has been slightly confusing. While it remains the market leader in cloud x86 servers, it's software strategy includes a VMware-based private cloud that is managed services focused and an installation and configuration software package for OpenStack.

The company also plans to launch a single-tenant OpenStack private cloud offering in late 2013 as well as a public cloud, which will likely take more time.

"We think the move to OpenStack makes sense given that the platform is open source and allows Dell to contribute to the code, but the platform continues to evolve and execution risks remain," Oppenheimer analyst Timothy Horan said in a note to clients.

Given that the company's PC and hardware businesses face structural obstacles, removing itself from the scrutiny of public markets gives Dell more cover as the cloud matures and the company develops and monetizes its strategy.

Since PC market is weak, Dell finds its next leg of growth in enterprise solutions and services, which includes servers, networking, storage, and services. CEO Michael Dell said in a recent conference that Dell would be the leading player in the server market. During the third quarter, Dell sold about 565,000 mainstream Intel-based servers, according to Gartner while rival market leader HP sold 630,000 units.

However, the job is still half done as Dell needs to tap more of enterprise customers. For example, gaining a customer such as Google, Inc. (NASDAQ:GOOG) would be a significant advantage as it processes huge volumes of data. Further, it needs to focus more on the booming micro server space.

Meanwhile, shipments of micro servers are expected to more than triple this year, spurred by "booming" demand for new data center services for mobile platforms and cloud computing, according to research firm IHS Inc. (NYSE: IHS). The information and analytics company projects shipments of micro servers to reach 291,000 units from 88,000 units in 2012.

IHS expects a slew of hardware providers to reap benefits, including microprocessor vendors like Intel Corporation (NASDAQ:INTC), ARM and Advanced Micro Devices (NYSE:AMD); server original equipment manufacturers such as Dell and Hewlett-Packard.

So, if you would us what do you think of Dell post merger, we would say old challenges still remains in "New Chapter."



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