Michael Dell should ask himself a simple question: "Who is
my daddy?" He says his current daddy Wall Streets
army of sell-side analysts and impatient investors with their
insatiable thirst for short-term results makes it
impossible for him to transform Dell from a PC maker into a
technology services company. He doesnt want Wall Street
to be his daddy anymore; he wants to grow up and be his own
daddy, and thus he is taking his company private.
On the surface this switch makes sense. Wall Streets
time horizon has been shrinking for decades. With Nobel-winning
theorists and their by-products betas, thetas and
whatever other "etas" leading the charge,
investors long-term decisions are analyzed on a daily and
monthly basis, thus turning what might otherwise be long-term
investors into long-term traders (an oxymoron).
The media are, of course, a great amplifier of this
misalignment. A recent Wall Street Journal article
that describes Coca-Cola Co.s "performance" is a great
example of this: "Over its past 20 earnings releases, the
company has lagged behind estimates only three times, and
always by less than 1 percent." This is statistically accurate
but primitive journalism; a ten-year-old could have written
this sentence describing how "well" Coca-Cola management
performed. I dont want to beat up on the Journal
too much the article did have some meat in it but
"beating" the guidance is a game that has little to do with
Cokes core business.
Unfortunately, CEOs dont live in a bubble, and they
read these articles too. As Pavlovs dog, if you get a
reward for "beating the numbers," you will start to respond to
Wall Streets carrots and sticks. Even if youre the
most rational, long-term-oriented CEO on the planet, quite
inadvertently, "beating the numbers" becomes the core of
managing the business. Building a business with a competitive
advantage that will last for generations which should be
the objective of any CEO will fade into the
Mr. Dell wants to create a legacy that his descendants will
be proud of; the company bears his name, after all. But toxic,
ADD-infested Wall Street doesnt provide an environment in
which a long-lasting enterprise can be built. Dell needs to go
through a transformation. Wouldnt it be great if Michael
Dell could report once a year to just a few private equity
partners who had a time horizon measured in years and who "got"
what he is trying to build? Of course!
Wall Street only becomes your daddy if you let it.
So Michael Dell should not blame Wall Street for his
companys current predicament and low stock price.
Thats too easy. He should direct the blame at himself.
Aside from the fact that he was the one running Dell when it
made unexciting, eye-insulting boxes and failed to come out
with a cell phone or tablet worth buying, he is the one who
chose to play by Wall Streets rules. He did not have to,
especially as he was a highly respected CEO who also controlled
15 percent of Dell shares.
Michael Dell let Wall Street be his daddy. At any point in
the past two decades, he could have come out and said, "The
long-term shareholders and I are the daddy here, not Wall
Street." He could have canceled quarterly conference calls and
stopped providing quarterly guidance. He could have let the buy
side and sell side make their own assumptions and do their own
research and not simply parrot what management said. He could
have communicated to shareholders the way many great CEOs do,
"Focus on the big picture, not minute details, and make no
short-term forecasts." The stock would have sold off initially
as the shareholder base went through a transition, but in the
long run only earnings power matters.
There is no Securities and Exchange Commission rule that
says every three months corporate management should do what
economists and meteorologists have miserably failed to do for
decades: forecast a lot of random factors (the global economy,
weather, political rhetoric from Europe and Washington, to name
a few), assess the magnitude of those factors impact on
their companies top and bottom lines and then spit out
earnings estimates. Good luck with that. "Guiding," "beating,"
and "missing" only make it into the C suites vocabulary
if it allows them to.
Every management gets the shareholders it deserves. Many
have held on to Berkshire Hathaway shares for generations.
Warren Buffett doesnt conduct quarterly calls; he
probably doesnt even know how to spell "quarterly."
Despite Buffett being stone-deaf to Wall Street, his
shareholders have done okay.
If Michael Dell is honest with himself, hell admit
that greed is his real daddy. He is stealing Dell from loyal,
long-term shareholders who believed in him. (The short-term
ones bailed a long time ago.) The PC business is not doing
great everyone knows that but despite popular
perception it is on a slowly declining trajectory, not facing a
dramatic falloff. (PC sales were down by midsingle digits
In a previous column I mentioned that PC makers like Dell
are simply logistics and marketing companies that outsource
R&D and manufacturing to someone else, and so they have
mostly variable costs. Thus, as PC sales decline, Dells
profitability will gradually decline, but it will not fall off
the cliff. The company has almost $4 a share in net cash. (The
figure is close to $6 if you deduct finance-related debt.) Dell
should earn about $1.70 in 201314, so Michael Dell
is buying (stealing) the company at less than 6 times earnings.
He obviously thinks Dells stock is worth a lot more, as
it was just a few quarters ago, when he directed the company to
buy its stock at higher prices.
I dont have a problem with greed; it is another word
for self-interest. Ill choose greed over altruism
anytime. But I truly hope Dells long-term shareholders
put up a fight and find enough votes to block the purchase, and
then find a CEO who can turn a deaf ear to Wall Street.
Katsenelson (firstname.lastname@example.org) is CIO at Investment
Management Associates in Denver and author of
The Little Book of Sideways