Dell Said to Near Buyout as Microsoft Talks Deal Financing
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I see that there are several reports of this rumor floating around, I suspect that its true and the 'leaker' is someone who is trying to get a better deal by letting the world know you can buy Dell for $14/share. I expect it is a positive for Dell to go private again, but I don't know if its in Microsoft's interest to be part of the game. I expect a successful Dell strategy might be to partner with Redhat and move their product line to something more standard with solid Linux support. Which is to say something closer to Supermicro's strategy but with Redhat on board.
Even according to your prediction, at worst they get their money back and then some. My guess is that MS wants the next Dell to still be a MS ally. Microsoft isn't going away anytime soon and Dell needs to keep that in mind if they want to be worth more than what it is today.
While there are many possible upsides, the one that stands out is that as a private entity, they can participate with Microsoft on research without worrying about Wall Street's demands for quarterly growth. For Microsoft, inside knowledge of the hardware roadmap will help them maintain leadership in the Enterprise segment.
As for Red Hat, they didn't earn $2 billion in net revenue last year. And Linux is certainly not a path to success with consumers or on the enterprise desktop.
Dell's strategy seems to be about increasing their enterprise presence. And that can be achieved in much the same way IBM or HP go about it which is a combination of software offerings, product mix, and consulting.
At the enterprise software level there is a 'gap' (at least I see one, it may be bogus) of enterprise level support for Linux systems. Red Hat does software support (RHEL) but they don't have a hardware business to go along with it. So if I'm an enterprise customer, and I want to install a Linux server 'farm'/'grid'/'cloud' and I want one team to "own" the support issues, I'm sort of stuck.
I recently did an evaluation of the HP Gen8 server hardware which was amazing hardware, but really suffered from a sort of 20th century server mindset. I've got Supermicro hardware which goes out of its way to be flexible, but I'm still chasing driver updates in enterprise linux builds (RHEL or CentOS). So having something a server choice that was strongly aligned to Linux in the enterprise space, and willing to provide first responder support to driver compatibility issues, that would be a good addition to the current choices.
And if one of your strategic partners was Microsoft, I expect it would be uncomfortable pushing a strategy that made Linux a solid alternative in the Enterprise at that level.
Nevermind that partnering with Microsoft made Michael Dell a billionaire and the thirty year relationship between the companies. Or the lack of a roadmap for Linux and a mobile strategy.
I ask because the statement "Red hat[sic] isn't cut out to be a full stack partner" is unsupported. Followed by the comment on "38M PC's Dell sells" in a year missed the point completely.
The margin in Dell's business is in servers. Not 'desktops' and not 'laptops' (which may be your primary exposure to the company, but I don't know). The successful enterprise server companies (IBM, HP, and to some extent Sun/Oracle) benefit from that 'full stack' support, but one of Red Hat's challenges has been that no single partner (with the possible exception of Supermicro) can extract the necessary cooperation from the third party device makers to get the support they need to drivers. IBM, HP, or Sun can say to Marvell "We're going to use your SATA controller in our xyz-666-3245-665-/A controller, if we can get driver source code and 24hr turn around on support issues." Those agreements will usually put a few exemplar machines inside of Marvell (or what ever vendor) which will work with the company to insure that the driver does everything it should and nothing it shouldn't. And more importantly when it breaks it gives enough information to turn around a fix in short order. Those relations cost resources and really are only affordable to companies that have a solid presence in the enterprise space. (or in places like Google where a lot of servers are being used internally)
Dell using Red Hat for their server OS partner, might feel more comfortable, and have better pricing control, than Dell using Microsoft as a partner. And at server volumes and margin points such a strategy is very doable. You could even play Canonical off the Red Hat guys for a bit of competitive pressure. All of that is cheaper than building a new distro team in house and not one of Dell's core competencies.
The more interesting statement though is the last one, "Nevermind that partnering with Microsoft made Michael Dell a billionaire and the thirty year relationship between the companies. Or the lack of a roadmap for Linux and a mobile strategy."
That is all accurate, but what is the truth? And this is where we have to guess. Was the lack of a Linux and mobile strategy because of the partnering with Microsoft? Or was it just a bad guess? If it was the former, then having Microsoft own a big chunk is a problem, if it was the latter then you're not going to get very quality advice from Microsoft based on Microsoft's track record on Linux and Mobile. Either way, what "was" for Dell may have lead up to their current situation, but seems pretty clear that continuing on with the same plan they have had for the last 10 years isn't going to result in success.
That leaves us on HN taking potshots at these dribs and drabs of information. Sort of like CIA analysts looking for a plot inside innocuous movements of goat herds.
The commodity Linux server world is going to switch, increasingly, to Supermicro or even lower margin providers.
The kind of enterprise sales which do bring in big margin and big absolute dollars for Dell are still Windows (and to a lesser extent, VMware), and include ok storage and crappy networking/accessories.
I think there's money in USG-scale desktop deployments, but it might just be a cost of getting the server business; it's hard to separate out "we can cover all of your desktops AND servers" into separate profitability for each line, since clearly servers, storage, and services are used to cross-subsidize the desktop/laptops.
The weakness for Dell is mobile (which Red Hat doesn't touch); Windows Phone may be a viable partner there, although personally I would have bought RIMM at the depths of their doom instead.
The other weakness has always been a lack of professional services, but we've seen how badly attempts at that have worked out for HP, too. What might have made sense would have been buying mid-market microsoft solution providers and rolling them into Dell Professional Services.
Partnering more with Microsoft seems like the best move for them to preserve total profitability; it probably isn't the best for Dell's overall position in 15 years, but I think that ship sailed; the biggest server vendors in 5-10 years are going to be building totally commoditized stuff to public specs, I believe.
Looking over some of the presentations from the Open Compute Summit it looks like Dell could play there. It has some attractiveness for a vendor that is operationally efficient. I don't see a lot of Windows support there but that may be that I just don't look for it for my shop.
One wonders if they get a big cash infusion from selling off their Laptop/Deskside business to an LG or a Asustek they might carve the company into a enterprise servers, storage, services (SSS) play. Not sure who would head it up though from their current management ranks. Alternatively an OCP/PrivateCloud play for companies that want a more fungible server architecture. Maybe take some of the wilder work Cutler did on the distributed computing side and productizing around that.
Not a fun place to be for them to be sure, I will be watching closely to see what road they pick and how well they execute on it. From such things one can learn quite a bit.
I really think preserving their (dying) enterprise margins gives them better total profit over the next 10 years, vs. being fast to position themselves for the bleak low-margin future. It's just like the RIAA labels -- made more sense for them to eke out $20 CDs for an extra year or four vs. going early into the MP3 future. Use the cash from $20 CD sales to then sue/force unprofitable licenses on anyone crazy enough to do music services, later.
The only really good thing about Dell is that they're not HP. HP has strong channel sales, especially in the middle east/etc., but has probably the worst corporate governance of any major company, and is generally doomed, too.
Many years ago, I bought an Amiga - it allowed me to feel persecuted. Then life went on, I built a 386 to run AutoCad, Commodore went bust and somewhere along the way I stopped feeling persecuted because everyone didn't see how great the Amiga was. But I remember the feeling and how futile the arguments.
Sure Dell makes money on servers. But they sell a lot of servers because they can be a single source and because being a single source adds value for their customers (27% of revenue from government customers) And of course, they don't lose money when Latitudes are on the same P.O. Indeed, some of them are high margin.
RedHat's challenges are not really relevant to the reason Dell may go private. Dell sells Linux because they sell hardware not because they share an anti-Microsoft ideology. Anyway, rather than lock themselves in to a single platform, maybe RedHat should look at TechData for a hardware partner...I think that's a very handsome building on their Wikipedia page, but then again I might be biased.
"Dell using Red Hat for their server OS partner, might feel more comfortable, and have better pricing control, than Dell using Microsoft as a partner."
An assumption that everyone hates Microsoft aside, there isn't much meat to hang the "might" upon. It's nice to have friends who can loan one money - Microsoft's $2 billion is more than RedHat's total revenue last year. Then again, Dell's net revenue last year exceeded Redhat's total asset value.
In other words, Dell plays in the big leagues, not double A where companies like RedHat lack a mobile strategy, have a weak desktop presence, and can't hit the breaking ball.
The biggest blindspot on HN is created by the rage people feel over Microsoft. My gut suggests that it's a bit of a blindspot for YC given PG's essays. On the other hand, I empathize with it. I once bought an Amiga.
I value reasoned arguments that can start from first principles and end up as rebuttal.
In the spirit of reasoned debate, allow me to try to summarize your arguments here:
1) Dell's server revenue is purely a function of their vertical integration (single source).
2) Red Hat isn't relevant because their revenues are small relative to Dell.
I am not persuaded by the argument that Dell's only competitive advantage is that they integrate a number of systems. If that were the only reason than HP, SuperMicro, or even Sun/Oracle should be able to capture market share away from them.
I'm not persuaded by #2 because I don't believe revenue is anyway at all to measure Red Hat's impact. I see their impact in the number of seats out in the wild and that is formidable. They are a supported OS on nearly every platform and Oracle has gone so far as to create a clone of their distro to "compete" with them. Oracle has more revenue than Red Hat.
And for the record, I too owned an Amiga, but I didn't feel particularly persecuted.
Fair. I will imagine that your premise that Microsoft and Dell are circling the drain can be well supported or - should my imagination be too limited - that there is some positive or neutral connotation for "circling the drain" of which I am unaware and that such a connotation is so widespread that any sophisticated reader would immediately pick up upon that connotation when reading your lead, and that it is I who have the blindspot. And if "summary" has been used as shorthand for creating a strawman, then likewise I have a blindspot regarding linguistic convention.
On the other hand, if I am not blind to some HN meme, "1) Dell's server revenue is purely a function of their vertical integration (single source)," is a mis-characterization of my reasoning as formal syllogism.
Single source helps Dell sell servers. It helps them sell desktops, laptops, switches, services, repair parts, et cetera. In 2012, 57% of Dell's revenue came from enterprise and government. Single source benefits Dell's customers by simplifying contract management. It simplifies logistics for their customers as well. None of this should be revelatory when it comes to bureaucracies. However the belief that this is a Pure Functions of Vertical Integration doesn't map well onto the messiness of empirical reality.
That's why I don't hold it. Dell sells server hardware for all sorts of other reasons. Sever farms exist. Ad hoc purchases happen. Heck, slap in a different video card and the box is a workstation - sixty pounds under my desk says this is so.
"2) Red Hat isn't relevant because their revenues are small relative to Dell."
Redhat is relevant. Dell will install it on server hardware at time of purchase. It's one of two Linux offerings. Yet, this doesn't qualify RedHat as a suitable long-term strategic partner. It doesn't disqualify them either. What would seem likely to disqualify RedHat as a long term strategic partner is:
A) limited market share B) limited product line C) limited resources they can bring to bear as a result of those limitations.
For better or worse, "Limited" describes RedHat's relevance as a strategic partner, as well. Dell is roughly an order of magnitude larger than RedHat both in revenue and profits. It is hard to see how a peer to peer partnership of the type you promote would work as a practical matter or create rocket fuel to drive Dell's growth. As a vendor, junior partner, or perhaps even acquisition target the relationship makes sense. But only more debt on top of that to go private is likely allow RedHat to grow to the size of Dell.
If Dell was really interested in pursuing a GNU/Linux first strategy, developing their own enterprise Linux might be a more sensible option. They would control vendor lock-in rather than giving Redhat control of the pudding. And Dell already has a support infrastructure in place and an intimate knowledge of hardware.
On the other hand, Microsoft has approximately the same total revenue as Dell. There's a long term business relationship which has persisted through three decades worth of market changes. Furthermore, Microsoft is able to provide services across the spectrum of computing hardware Dell is likely to produce in the short and medium term, and over the long term the track record indicates Microsoft is likely to provide similar support as the market evolves.
On the other hand, Oracle might be the ideal strategic partner for Dell if they were to go on a Microsoft free diet as they control the licensing of many important FOSS technologies. Certainly, they are about the same size as Dell and more plausible as a market maker.
I suppose one could argue that RedHat's potential impact as a market maker is comparable to Microsoft or Oracle's, though it seems not an argument consistent with peripheral vision or the use of rearview mirrors. It would be hard to argue that any relevance they have is not under greater threat from competition than Microsoft. It doesn't take as much to step in RedHat's pudding as is required to compete with Microsoft - i.e. Canonical, Oracle, Suse, and potentially Dell themselves can provide identical products. Linux is commoditized.
Your suggesting they should turn their back on the majority of their current user base.
Doesn't sound like such a smart business move to me.
So I'm not exactly sure what this would achieve in the way of cost savings.
In fact by adding in another OS layer the business tech support costs may in fact rise.
Offices are still buying desktop PCs by the pallet-load. What are they buying?
edit: I'll answer my own question: http://en.wikipedia.org/wiki/Market_share_of_leading_PC_vend...
The PC market is fairly cutthroat, a result of, all things, Microsofts general business philosophy of commodifying its complements.
EDIT: And in some places, virtual machines. Good for MS and those places, not so good for Dell.
All VMs run on hardware.
1) only time I have ever lost my cool with a vendor
Stagnation in innovation is coming back to bite them.
Again, Microsoft is not buying Dell, Silver Lake Partners is.
It makes a lot of sense for MS 1. from a strategic standpoint, 2. Microsoft having tens of billions of cash reserves which need a return, and 3. MS + Silver lake have a prior relationship: MS purchased Skype from them.
> "I’d shut it down and give the money back to the shareholders"
Dell on Dell today:
See above.
Sound like he heeds his own advice
Have to respect that :)
I expect Dell to be a much smaller company a year from now.
Macbooks are very expensive out here, plus Apple warranty is really, really bad.
Surprisingly, the other company which has a decent after sales support is Samsung (Lenovo sells through resellers, which screws up the experience).
It might sound strange to the HN crowd, but I've actually seen more loyalty toward Dell than MS in "the enterprise" recently.
I could see a strategy around retaining and expanding certain parts of the the enterprise business being enabled by owning and integrating the entire stack.
dell for consumers is done. low margin commodities can be done without that kind of overhead. a race to the bottom is profitable for while, but then you reach it and boom.
What I don't get is why they're submitting to a leveraged buyout.
And going private is the best way for Dell to pivot out of that segment without shareholder lawsuits. Or to pivot within it.
EDIT: Guess not (which isn't too surprising)
And my old employer bought dell desktops. I guess they had some bulk deal or something. They always seemed basically fine, and felt pretty solidly put together - I wouldn't have wanted mine to fall on my foot. Some of the staff had dell laptops, and nobody seemed to have much to say about them one way or the other. Which is probably exactly what you want, really...
I can't speak for older Dell stuff, nor for anybody else's experience, but I've seen no evidence that their computers are worth avoiding.
However, I think they had some problems before that and this might be one of the reasons why they're in a pretty bad shape right now (the other big reason being the iPad, tablets in general, Android, etc. of course).
Interesting