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On a sunny October afternoon, about 350 Dell Inc. employees gathered in a glass-enclosed conference room in Santa Clara, California, to hear from Michael Dell for the first time since his plan to take the PC maker private was approved a month earlier.
He joked, earning laughs and cheers after saying he’s glad he doesn’t have to introduce them to billionaire investor Carl Icahn, who made a noisy public play for the Round Rock, Texas-based company. When he’s done talking about 45-minutes later, more than a dozen employees rush forward to have their picture taken with their iconic chief because they know he’ll happily pose — something not many other tech executives would do. He doesn’t disappoint. And he leaves them laughing and cheering again after answering a question about what’s keeping him up at night. “I’ve been sleeping pretty well lately.”
It’s been 15 months since Michael Dell gave serious thought to going private, and there’s been lots written about the nasty fight over the nastiest tech takeover in history. The “background” spelling out the negotiations that led to Dell’s private-equity buyout covers more than 40 pages in a Securities and Exchange Commission filing. It details every phone call, meeting, presentation and discussion that took place between June 15, 2012 — when Dell was contacted by its second-largest shareholders suggesting it was time to consider go-forward options including taking the company private — and Feb. 5, 2013. That’s the day Michael Dell and investment firm Silver Lake announced their proposed $24.4 billion transaction.
The tick-tock of the deal doesn’t end there, though. A special committee of Dell Inc. ‘s board started a go-shop process in February in which it asked other suitors to come courting. They did, including buyout firm Blackstone. There was also shareholder Southeastern Asset Management and activist investor Carl Icahn, who argued against Dell’s transaction because they believed it undervalued the company and cheated investors. The events that happened after Feb. 5 and leading up to Sept. 12, the day Dell shareholders approved the final $24.9 billion deal, fill several dozen pages more.
What the filings don’t say is what exactly Michael Dell, who started the company with $1,000 out of his college dorm room, was up to while that noisy public fight played out — and how important it was for him to win.
‘It is not the critic who counts’
A look at Dell’s Facebook page suggests it was business as usual for the CEO. On his 48th birthday in February, 18 days after the transaction was announced, Dell and his wife, Susan, went for the birthday bike ride he undertakes every year, cycling one mile for each year of his age. In April, he thanked customers “for their trust and confidence” after the company won industry awards. In May, he posted Mother’s Day wishes along with a photo with his mom.
By June, though, with the Icahn-Southeastern battle heating up, his Facebook comments took a different turn. Dell posted a picture from the Lincoln Memorial and the line: “With every great success there is courage, service and sacrifice.” And two days after shareholders green lighted the buyout, Dell treated his more than 40,000 Facebook followers to a quote from Theodore Roosevelt that begins: “It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose faces is marred by dust and sweat and blood.”
I asked Michael Dell exactly how he had spent the last eight months. A week after the deal was announced, Dell says he took to the road, going on a global world tour to visit the people that mattered most to him — employees, customers and partners. He visited China, three times. In September, after a long summer in which Icahn tweeted, among other things, “Of all his scare tactics Dell has finally come up with the best one — he’ll stay as CEO if we don’t accept his offer,” Dell met with potential customers in New York. About 30 executives in the financial sector gathered to hear his pitch on Dell’s enterprise solutions, says Jeff Clarke, one of Dell’s earliest employees and now head of the PC division. Customers were impressed with Dell’s grasp of the technical challenges they faced and “his ability to describe what we’re doing and how we’re doing,” Clarke says. “We walked away with a few leads, which is how the process starts. We walked away with an invitation to visit companies.”
That’s not to say customers weren’t nervous. Dell said a few asked for a change of control provision in new contracts if he were no longer CEO. A large bank that had standardized on Dell servers had their risk management team come up with a contingency plan if the ownership changed. And while they didn’t lose any customers, Dell says they did fail to close at least one deal over the Icahn-induced drama.
In the weeks after shareholders signed off on the buyout — Dell is officially private as of yesterday — Dell says he continued his travels. In the past two months, he’s been in San Francisco for Oracle Openworld, and in Florida meeting with top channel executives He returned to Silicon Valley in mid-October to talk with the 1,500 Dell employees based there before heading to Europe to meet with customers and partners.
In a candid conversation after the employee gathering in California, Dell shared his thoughts behind taking his company private, why he’s not giving up on the PC business, and what he thought of the public battle with Icahn. Here are edited excerpts from the conversation.
Q: Let’s talk about the decision to go private. At a Sanford C. Bernstein & Co. conference in 2010, you were asked if you had ever considered going private and you said simply “yes.” But your team tells me you were just being honest, that it was one of the many options you had considered but you weren’t serious about at that time.
I’m an honest guy (Laughs.) It wasn’t like oh yeah we’re meeting with bankers and coming up with plans.
Q: Why was the timing right when Southeastern approached you in June 2012 and discussed going private as a possible option for Dell?
It seemed to be an impossible thing to do. When it appeared it was possible to do, I absolutely jumped right on it.
It is a complicated process…But I knew that when I kicked off the process, it’s not like you can put the toothpaste back in the tube and say, ‘Just kidding.’
Q: Where does Silver Lake come in?
Egon [Durban of Silver Lake] approached me in July — that’s not what he told me what he was thinking. I passed him in a hallway at a tech conference and he said, ‘Hey I’d like to meet with you. I had never seen him before though I’d heard his name.
So we meet and we go for a walk. He said you should think about taking Dell private. And I said, that’s interesting. Why don’t you tell me your thoughts on that? Why you think that would be a good idea? How would that work? The idea had occurred to me. I had studied a little bit of the math. I know how private equity works – I have MSD Capital. I know how private equity works.
So I had him tell me in his words why he thought it was a good idea. He explained that. I said let me think about that.
Another one of my neighbors [in Hawaii) is George Roberts of KKR. I’ve known George for a long time. I said ‘Hey George, using only publically available information, do you think it would be possible to take Dell private?’ And he said, ‘Yeah I think it would be possible and we’d like to talk to you about doing it.’
So then I said, time out. Gotta call the lawyer. Don’t want to make any mistakes. Tell the board. Do everything the right way.
It became clear right at that moment that it was possible. The stock price, capital markets — and you look at the cash flow of the company, you look at the assets of the company. We pursued it.
Q: You moved fairly quickly? According to the filings detailing the particulars, you met with Silver Lake and KKR in August and also approached the board that same month about the idea for going private?
It seemed to be an impossible thing to do. When it appeared it was possible to do, I absolutely jumped right on it.
It is a complicated process…But I knew that when I kicked off the process, it’s not like you can put the toothpaste back in the tube and say, ‘just kidding.’
Q: I would imagine that you’re heavily invested in dell, and I don’t mean that from a financial perspective. This is your life’s work….
I will care about it after I’m dead.
Q: A lot of people say you had five-six years to work on this transformation and at the end of it, you say we’re going to take it private. That seems like a cop out.
I’m not copping out. I’m doubling down. I bought the whole company back.
Our emphasis shifts completely to customers… There’s all sorts of suboptimal decisions that you make for short -term reasons as a public company that you won’t make any more.
Q: But why are you the right person to do it? Why do you want to lead this transformation?
It’s fun. I’m very passionate about it. Our company makes an enormous difference in the world. When I look at all the challenges and opportunities that are happening in the world, we play a big role in progress. Whether it’s in education, healthcare, energy, environment, enabling all these new businesses out there—I look at what we did in democratizing the access of IT for the hundreds of millions of products that we sold over the last couple of decades, the same opportunity exists in the broader $3 trillion IT market.
As a private company, we have lots of flexibility that we never had.
I love this stuff. It’s fun for me. I couldn’t be more thrilled to have control over my own destiny in a way that is not possible as a possible company.
A characteristic of that is I surround myself with a very talented team, the best team I can find to run the big businesses that we have. I do think a founder has special permission to make sweeping changes across an organization. I think when you look at the changes that have occurred over the last four or five years — some short-term minded folks didn’t appreciate those as much as customers did. We made a tremendous amount of progress in changing the business in material ways and if you look at our cash flow, it grew substantially over the past 12 months.
Q: Carl Icahn’s entry into the process kicked up the drama. Did you think he might make a play for the company?
When we were thinking about this in November through January, nobody thought he would show up.
Just too big. First of all, he never made an offer to buy the company. Never had the money to buy the company. Never wanted to buy the company. He got on television — lied, manipulated.
I will give you a great example. He goes on national television and says appraisal rights is a ‘No brainer.’You should vote no because you get your appraisal rights.’ Well if you ask any lawyer who knows anything about appraisal rights, they will say this is not a no brainer. This is very complicated. This is years of difficulty.
He’s just playing his game to try to get people to vote no, to get the price up.
Before the vote, he calls me up and says, ‘Congratulations Michael you did a great job. I’m really happy for you. I thought you handled everything really well.” Then after the vote, he says, “We’re not doing our appraisal rights.” He just lies.
It’s a big poker game to him. It’s not about the customers, it’s not about the people, It’s not about changing the world, making a difference in the world. He doesn’t give a crap about any of that. He didn’t know whether we made nuclear power plants or French fries. He didn’t care.
Q: You just told employees that one of the biggest misconceptions about Dell is that you’re getting out of the PC business. You said that’s absolutely not true. Why?
The death of the PC — the obituary has been written before.
I think about the customers I went to go visit yesterday. I went to an airport, I went to a hospital, I went to a healthcare provider. I went to the special air force command at MacDill Air Force Base — PCs, you can be sure were in enormous quantities in all those organizations. They play absolutely mission critical roles and they’re not going away.
The easiest point of entry into a customer for us are PCs and servers…It’s because they’re ubiquitous products used by every company. Then you have a platform that you can build upon into storage, security, services.
Q: You’ve been criticized for being slow to transform beyond PCs – when you started your transformation four plus years ago, PCs accounted for 60 percent of revenue. After $13 billion in acquisitions in software, services, etc., you’re still at 60 percent PC revenue.
We’ve always viewed [PCs] as a business that’s got a lifecycle to it. Growth is in new areas and it’s a business you’ve got to manage very efficiently from a cost structure. It’s still a great way to get into new customers.
That’s why we went and did all [these acquisitions]. If you dial back the clock —, okay, we bought EqualLogic and then we kicked off this huge wave of investment in data center, services, storage, security. If we hadn’t done that, what would we have today? We’d have PCs and servers.
There’s also an enormous misunderstanding about how we make money. People think we make money by actually making PCs. That’s not actually how we make money. We make money by selling PCs and servicing PCs, which is very different from making money by making PCs.
And we’re working hard to build this $21 billion business to $30 billion, $40 billion – basically you’ve got public investors saying, ‘You’re a PC company, don’t invest in all t his stuff. Don’t acquire all this stuff. Don’t go invest in R&D.’
Q: When did you decide that being a PC only company wasn’t going to be enough?
There were a couple of things going on. The first is we saw that the challenges that customers had that couldn’t be addressed just by having hardware. And so you had to have services, you had to have software, you had to have more capabilities in security. We also saw some technical things happening, like a converged infrastructure of networking and storage, where these things were coming together and the lines that separated one thing from another were blurring, starting to disappear.
The other thing we saw was this amazing, unsolved problem in how do you make that stuff affordable for enormous numbers of customers, just like we did for the PC. If you think about the commercial [information technology] space, IT is pretty expensive. Dell’s a company that has changed the IT landscape in making PCs and servers more affordable. There’s enormous opportunities to make IT more accessible to tens of millions of companies, kind of democratizing the ability for companies to gain access to IT.
Q: So that’s the underpinnings of the transformation plan? And it started when you bought storage maker EqualLogic [for $1.4 billion] in late 2007?
I couldn’t say there was a particular thing that happened or a particular day. We actually started this earlier and what we realized around 2007 – at the scale of Dell, the only way you were going to move the needle quicker was acquisitions. We were doing organic development. We moved into all kinds of our businesses organically, with our own investment and we still continue to. But [we needed] to build capability quickly, in security and systems management and particularly in services – services is very people intensive. We built a very nice services business internally, but to get the expertise in verticals, takes people.
Q: That explains why you bought services provider Perot Systems [for $3.9 billion in TK). Company watchers though were saying Dell wasn’t moving fast enough to set up the chess board beyond PCs. Do you wish you had built this “new Dell” with services, software and all that other technology faster?
Yeah. But if you step back and look at it, we took a $10 billion business to $21 billion in five years. That’s actually pretty impressive (Laughs). You don’t find many businesses in the enterprise that are $21 billion. Also, you think about the companies that have earned the trust of customers in that space — a lot of them were in existence well before I was born.
I started a company when I was 19 years old. In the mid-1990s, we went into servers. That was kind of a long shot. People were like, ‘Oh that’s never going to work.’ Here are we are today with No. 1 in share in x86 servers in North America, in APJ, and we’re very, very close to No. 1 worldwide – in units. In x86, you see something similar here too. We have more disks, more memory, more services that go with our units as well. We don’t have the mid-range stuff, we don’t have the mainframe stuff. But it’s a good place to attack. There’s a soft underbelly of enterprise IT that Dell can attack as a disruptor.
And so I look at that and say, all right. Not only can we attack these profit pools, but we can democratize the access of IT for tens of millions of emerging and growing businesses. And we can take that same technology and sell it to the biggest companies in the world.
Q: You’ve said you see Dell being able to gain a larger share of the $3 trillion IT market, a share you put at 2 percent today. How?
The IT industry is roughly $3 trillion overall. If you have 1 percent of $3 trillion, that’s $30 billion. If you have 2 percent, that’s $60 billion. If you have 3 percent, you have $90 billion.
Nobody has 5 percent or 6 percent. There’s only 10 companies on the planet that have more than 1 percent. We’re one of them and we have 2 percent.
And what’s happening is as IT moves from 20 years ago, when we were having our first servers, it was in the back rooms and finance. Now you actually can’t do anything without IT – you can’t do sales and marketing, education, healthcare. So the market keeps getting larger and larger as people keep doing more and more with IT, so that expands the pool, it expands the opportunities.
I look at our teams that are adding salespeople, building channel partnerships. There are vast spaces of growth for us. We’ll also be investing in R&D.
Q: You've said part of the plan is to go after mid-sized customers. Why?
If you go back to the $3 trillion, the mid-size companies are the biggest part of the $3 trillion, the fastest growing part of the $3 trillion and also the most underserved.
These are companies that go to retail stores to buy their IT, because they’re too big. They’re too small to get the attention of the direct sales forces of any of our competitors in the 1, or 2 or 3 percent. We’ve always had a wonderful direct access and direct relationship to those customers. And the kind of solutions we’re building are readily adoptable and accepted by those customers.
Then those solution that you build for those fast, scalable companies, like the ones you find here in Silicon Valley, we can also sell to Goldman Sachs, Boeing, Ford, Siemens, Toyota, Ericsson and Emerson.
Q: You mentioned earlier there were some material changes going on inside Dell that outsiders didn’t appreciate. One of them was shifting from running the business around regions to creating a Business Operating Team about 18 months ago that oversees the 4 divisions: End user computing or PCs, enterprise systems including servers and storage, services and software. Why is this important?
As you have more intellectual property, higher gross margin businesses, there’s more diversity among these businesses. Reporting it by region was just not the right thing.
With all these acquisitions, they’re basically product companies and we had to plug them into something and so now we have these four businesses. If you buy a software group, it goes into the software group.
One of the challenges I had if I go back to 2007 — what was the superstructure of Dell. We had consumer, small business, public and large enterprise. Ok everything is going along. If you have a homogenous one product line, PCs and servers, that works fine. Now we’re into software, services, data center. The problem you have is all the top people in the company don’t know how to do those things. Ooh, that’s a problem. You have to say, ‘I have to go get some people who know how to do this.’ It took us a couple of years. Now it’s all settled down, we’ve got the right structure and it’s the four businesses with one go to market organization.
The thinking is that we have four presidents running large businesses that range in size from a $1.5 to almost $40 billion. Each of them have P&Ls, and then we have a unified go to market engine. There are very clear lines of accountability, responsibility. That team needs to operate extremely well together. I’ve given them a clear charter and a clear set of priorities.
There are some things they’ll disagree on and I’ll come in and understand the different perspectives, resolve it, make a decision and go. There’s an operational cadence to the business that that team is very involved in driving.
Q: And the one go to market unit – why is that a big change?
Steve Felice who runs the one go to market, he plays an enormous role in making this BOT work. He’s the connector of all the product offerings, the one throat to choke for customers. We hear consistently [from customers] that they love the fact they have one throat to choke from Dell. We don’t want four, five seven sales teams calling on us uncoordinated, pointing fingers. It goes back to this customer relationship that we have that is incredibly important and valuable.
Q: How did you spend the last eight months?
I was on a world tour. I went to China three times. I was out visiting all of our key sites, reassuring our team members — ‘Don’t believe all that stuff you’re reading in the press. That’s all nonsense.’
I wanted to go on TV. The lawyer said no. I wanted to do interviews. There were blackout periods. I could go and talk to customers, talk to employee groups. And I did. We went to every big site and a lot of medium-sized sites.
Q: What were you telling customers? I know at one point you came out publicly and said that even if your buyout plan didn’t work, you planned on staying on as CEO.
I went to visit a large bank and this bank had standardized on Dell servers. And their risk management team had come up with a whole contingency plan of what they were going to do if the ownership of Dell changed and I was no longer CEO.
We had customers asking us for change of control provisions if I was no longer the CEO for new contracts. It was not a large number of customers, but there was a distraction factor that occurred with some customers. So I was calling them on the phone, going to see them.
Q: You just told your employees here in California to think of Dell as a really big startup and encouraged them to think entrepreneurially. How does that happen at a company with more than 100,000 employees?
Over time that stuff builds up. You have to break it down and get people to accept risk, encourage it, accept some amount of failure.
Also simplifying the objectives and what you’re measuring. We’ve talked about it internally – let’s focus on cash flow and let’s focus on growth. It’s incredibly clarifying.