install on each computer chassis. An entire PC was custom-built in minutes.
These days, things run less smoothly. The PC market Dell once dominated has been eroded by tablets, a sector that the company has struggled to compete in, and smart phones, where it hasn’t even bothered. As a result, one of Texas’s biggest success stories must show that it can do what few of the state’s tech pioneers have done—change with the times.
Compaq Computer couldn’t do it. BMC Software has been trying for years and now faces a future as uncertain as Dell’s. Only Dallas’s Texas Instruments managed, morphing from oil-field services provider to defense contractor to chip maker. But where TI has a decades-long legacy of strong leaders, Dell has always been an extension of its founder.
The story of the company’s stratospheric rise has been told many times. Michael Dell, a Houston-raised wunderkind—he applied for his high school equivalency exam when he was eight—began the company in his University of Texas dorm room in 1984 and turned it into a tech titan in a decade by offering buyers custom-built computers at a bargain. By 2000, it was selling more than $35 million worth of computer gear a day. For many years it ranked as the best-performing stock on the Nasdaq exchange, and it held on to its lead as the world’s biggest PC maker even after the merger of its two main rivals, Compaq and Hewlett-Packard. It was a pillar of the Central Texas economy for two decades—even today it employs about 14,000 people in the greater Austin area and has been the economic taproot for Round Rock’s explosive growth—and has operations worldwide.
In the past decade, though, Dell has stumbled. In 2004, after having run the company for twenty years and approaching his fortieth birthday, Michael Dell decided to step away. He remained chairman but turned over day-to-day operations to president Kevin Rollins. Almost immediately, growth slowed and Dell’s shares faltered.
During the next few years, Dell endured an embarrassing battery recall, several quarters of poor financial performance, and an accounting scandal that resulted in a $100 million civil penalty against the company and $4 million each against Michael Dell and Rollins.
By 2007, Rollins was out and Michael Dell had returned as chief executive. The company, though, has never been the same. The leadership changes and internal turmoil hit at a critical time. With management distracted, the company was blindsided in a way that Michael Dell had always feared. When I interviewed him in 2001, he told me he worried most about “potentially new technologies that could change the industry.” That’s exactly what happened.
Both the business and consumer tech markets have moved beyond the PC, but Dell remains tethered to it. PCs account for about half of Dell’s sales, and while millions of desktop machines and laptops are still sold by Dell and others every month, the business is in decline. Dell’s latest quarterly profit tumbled 79 percent from the previous quarter, while sales slid 2 percent from a year earlier. PCs have become commodities, a tool as interchangeable as a hammer or screwdriver. Cheap memory and better reliability mean companies and consumers keep their machines longer. Price competition is fierce and profit margins are razor-thin. And the mobile crowd, which is driving the new growth market, can’t be tied down to an old-fashioned “grandpa box.”
With the company’s stock price languishing, longtime investors have become increasingly uneasy. Last year, its biggest independent shareholder, Southeastern Asset Management, suggested that Michael Dell take the company private. That touched off a series of discussions with private equity firms. Silver Lake, a California firm that specializes in technology investments, agreed to participate and eventually put together a bid of $13.65 a share. Southeastern, which was clearly hoping for a higher price when it first raised the buyout idea, decided to challenge the deal and joined with activist investor Carl Icahn to put together its own bid. On July 18, this bidding war culminated in a shareholder vote at Dell’s glass-and-limestone headquarters, in Round Rock. But whatever happened— texas monthly went to press a week before the vote—one thing is clear: Dell must become a completely different company.
That’s a tough move, because other than its talent for squeezing costs and creating manufacturing efficiencies, Dell has never been an innovator. Its research spending has long paled in comparison with that of its major competitors. Yet Michael Dell has spent the past few years steering the company toward the lucrative market for business services—servers, data storage, software, and consulting. The PC landscape is littered with the graves of others who failed to navigate that course. Compaq is gone, Gateway is gone, and IBM sold its PC business to China’s Lenovo.
Redefining its mission is one justification for taking Dell private. It’s not easy to quickly transform a company and keep shareholders happy at the same time. “As a public company, we must take a more cautious approach to our transformation, because we must consider how our stock price will react to the steps we take and what effect that will have on the company and on customers and employees,” Michael Dell told investors recently. “This hurts the speed and efficacy of the transformation and is not good for the long-term health of the company.”
Free from quarterly earnings demands, Michael Dell has argued that he could sacrifice short-term profits and keep an eye on the future, moving the company firmly into business services, which unlike the PC market comes with long-term contracts and a more predictable revenue stream than fickle PC buyers.
Michael Dell has been laying the groundwork for just such a turnaround by embarking on a massive buying spree, starting in 2008 with EqualLogic, which makes data storage gear for big companies. Since then, Dell has made more than a dozen acquisitions, including Dallas-based Perot Systems. Before 2007, Dell had acquired less than half as many companies in its entire history.
“There have been fundamental shifts