Challenges of strategically realigning a firm
• What it takes to achieve a "competitive edge"
• The importance of getting out in front of rather than simply reacting to market changes

With the PC market maturing, Michael Dell continued his effort to shift the firm more toward software and services. In doing so, he closed the biggest deal in tech history in 2016 in acquiring data storage provider EMC in a deal valued at more than $\$ 63$ billion. Dell reasoned that the takeover would enable Dell Inc. to achieve a "competitive edge" over others battling it out in the software and services marketplace. A competitive advantage involves a strategy allowing a firm to gain sales, increase profit margins, or both over its primary competitors by better satisfying customer needs than its competitors. A competitive advantage can result from the pursuit of cost leadership, differentiation, focus, or in rare cases some combination of these strategies. The extent to which it can be sustained often reflects the ability of a firm to build barriers that insulate it from the actions of its competitors.

The size of the deal was possible largely because Dell Inc. was a private company and ownership was heavily concentrated. As such, Dell Inc. was able to make decisions without interference from public shareholders that might have occurred due to the potential reduction in near-term earnings per share. The firm was able to finance the deal as a result of a substantial reduction in the amount of debt incurred when Dell Inc. was taken private and through the use of tracking stock as a form of payment. The latter reduced the amount Dell Inc. had to borrow to pay for the transaction. Finally, the time was right. Unwilling to break up the company, EMC's senior management and board had run out of options and were experiencing considerable pressure from activist shareholders to improve performance.

The takeover of EMC represented another bold move by Michael Dell to reposition the firm bearing his name for the 21st century. What follows is a discussion of Dell's efforts to transform the company from one concentrating on personal computers to a firm offering customers an array of integrated solutions to problems whose resolution was critical to the performance of their businesses, the methods used, and the challenges remaining to achieve this transformation.

Dell Computer was founded by Michael Dell in his college dormitory room in 1987. One year later, he took the company public at 23 years of age. He was 29 when his firm hit $\$ 1$ billion in revenue and 31 when it achieved $\$ 5$ billion. By 2001, the company became the global leader in PCs. Over the next 3 years, the firm sustained continued growth by diversifying into servers, storage, printers, mobile phones, and MP3 players. In 2004, Dell stepped down from the day-to-day operations as CEO, appointing Kevin Rollins to that position, but he retained his role as Chairman of the board.

The success was not to last as the firm failed to anticipate the massive shift of the desktop PC, its primary revenue source, to the notebook PC. By 2006, Dell had lost its number one spot in the PC market. In 2007, Michael Dell assumed control of the firm again and moved quickly to expand its software, networking, security, and services offerings. The firm's long-term business strategy was to shift its focus from its end-user computing business (EUC), which includes PC, mobility, and third-party software, to its enterprise solutions and services business (ESS), which provides highermargin enterprise-wide solutions and services to businesses. The firm spent $\$ 13$ billion to acquire 20 firms including spending $\$ 3.9$ billion for IT services provider Perot Systems.

The transformation to become a more ESS-driven business proved to be more challenging than first believed. Other tech firms had a commanding lead in the software and services business including HP, IBM, Cisco, and Oracle. As a global IT company with significant dependence on the PC market, the Company continued to be highly vulnerable to the fundamental long-term changes in this market.

What the firm was trying to do would require years and in the near term the firm's earnings would suffer. Shareholders were unlikely to accept a protracted period of depressed earnings. Michael Dell was at a cross-road: To remain public or to take the company private by buying out its public shareholders. He opted for the latter strategy.

The events of 2013 surrounding the conversion of Dell Inc. from a public to a private company proved turbulent, pitting billionaire entrepreneur Michael Dell against billionaire activist investor Carl Icahn. Sensing an opportunity to save the multibillion-dollar tech firm he had created in the late 1980s, Michael Dell initiated an audacious move to buy out public investors. The objective was to change the firm from one dependent on PCs to one focused on software and services. To be successful, he felt he needed to gain unfettered control over the firm.

The strategy required layering bone-crushing debt on the already foundering firm. Midway through Michael Dell's effort to privatize the firm, well-known corporate raider Carl Icahn entered the fray using social media such as Twitter and TV interviews to vilify Michael Dell's leadership and personal ethics. Both Dell and Icahn were smart, aggressive, and accustomed to winning. The subsequent effort to take the firm private became one the nastiest tech takeovers in recent history. The stage was set for a battle of the billionaire titans.

From start to finish, the deal took more than 1 year to complete. On October 31, 2013, Dell Inc., one of the world's leading PC manufacturers, ended its 25-year history as a public firm. Dell paid $\$ 13.88$ per share, which represented a $36 %$ premium over Dell's share price 90 days prior to the merger announcement date, and which valued the Company at $\$ 24.9$ billion. $^{42}$ The deal included Michael Dell's 16% ownership stake, valued at more than $\$ 3$ billion, and another $\$ 750$ million of his cash along with $\$ 21.2$ billion from Silver Lake Partners, a consortium of lenders, and excess cash on Dell Inc.'s balance sheet. The transaction boosted Michael Dell's ownership stake in the firm to 75%, with Silver Lake holding the remaining equity.

In 2015, the new Dell Corporation has more than 160,000 channel distribution partners (i.e., parties selling Dell products), with about $\$ 20$ billion of the firm's $\$ 65$ billion in annual revenue coming from these partners. This compares to zero in 2008. The firm has also doubled the number of sales specialists with technical training to 8000 from 2009. The firm is experiencing increasing success in encouraging existing customers to buy more expensive products and services. About $90 %$ of its customers that buy PCs also buy other products and services.

With 110,000 employees worldwide, the firm's current objectives are cash flow and growth: cash flow to pay off the firm's debt and growth to increase the firm's value when it is again taken public. Incremental cash flow is expected to come from increased sales and slashing costs, with a target of $\$ 2$ billion in annual cost savings. As a private firm, it will have fewer regulatory hurdles and disclosures than a public firm, allowing for a speedier execution of its business strategy of growing its enterprise solutions business.

The challenges the "New Dell" faces are daunting. Michael Dell must transform the firm from one dominated by PCs to software and services and to generate sufficient cash to pay off the $\$ 20$ billion in debt. Dell's market share in software and services is about $1 %$, but these are the only categories making money. Dell is battling traditional rivals in software and services such as HewlettPackard and IBM and must now combat new entrants such as Amazon and Rackspace that are expanding in the cloud-based storage and services business.

The firm's fortunes improved markedly in 2015. According to tech-industry analytical firm IDC, Dell's global PC shipments increased by about $10 %$ over the prior year. In the United States, Dell's shipments increased by almost $20 %$ bringing its total share of the US PC market to $26 %$. This compares to market leader Hewlett-Packard's share of about $28 %$. The improvement in the firm's PC sales may provide sufficient cash to finance Dell's changing product focus. Dell's operating performance appears to be holding up as its share of the global PC market has held steady in recent years at about $14 %$.

While taking the firm private appears to have improved the firm's financial performance, Michael Dell believed that more change was necessary to achieve his strategic vision. Dell saw EMC as an opportunity to accelerate movement toward realizing this vision. He believed that acquiring EMC would enable the firm to combine its server businesses with EMC's storage and virtualization businesses to offer a broader range of products to challenge Cisco Systems, IBM, and HP in the areas of cloud computing, mobility, and cybersecurity.

In striking its deal for storage provider EMC, Dell and its financial partner, private equity firm Silver Lake, are betting that this huge acquisition will help Dell, one of the best-known names in the industry, move increasingly into the fastest-growing areas of the IT industry. Both Michael Dell and his private equity partner Silver Lake had shown an ability to consolidate industries.[^0]

Understanding how the EMC transaction unfolded requires an appreciation of the personalities of the CEOs of the firms involved. Billionaire Michael Dell had a passion for preserving and growing the business bearing his name, and the 68-year-old EMC CEO Joseph Tucci sought to protect his legacy. He had been considering retiring since 2009 but postponed it several times amid his firm's slumping stock performance, pressure from activist investors, and a changing environment for computer storage. In agreeing to the deal, Mr. Tucci had an opportunity to establish a positive legacy and generate almost $\$ 27$ million more in compensation than he would have received had he willingly retired. His employment contract provided for his receiving the additional compensation if he were ousted due to a change in control of the firm. He built EMC into what it is. EMC had become his identity, and he didn't want to see it dismembered.

Activist hedge fund manager Paul Singer of Elliott Management was among EMC's largest investors and had been pushing the board and management to break up the firm. Investors had shown their dismay with the firm's performance by pushing down EMC's share price by over 15% during the 3 years prior to the announced takeover by Dell. Founded in Boston, MA, 40 years ago, EMC has struggled over the past decade as the cost of data storage has plummeted. Subsequent acquisitions have failed to reverse the firm's operating outlook. The bulk of the firm's value is concentrated in its $81 %$ ownership stake in VMware, a popular maker of virtualization software that emulates different operating systems. As a collection of largely unrelated businesses ranging from data storage to networking to content management, the value of EMC's shares suffered from a conglomerate discount.

But Mr. Tucci balked at the idea of spinning off VMware. Instead, he sought to be acquired by Hewlett-Packard, although these talks reportedly ended in late 2014 after more than a year of discussions. The failure of these discussions provided an opportunity for Michael Dell to contact Mr. Tucci.

Dell agreed to pay the equivalent of $\$ 33.15$ per share for all of EMC's outstanding shares. The offer consisted of $\$ 24.05$ in cash and tracking stock valued at $\$ 9.10$. The tracking stock mirrors the value of the roughly $20 %$ of VMware's outstanding shares already trading on the New York Stock Exchange. In theory, the tracking stock should fluctuate with the value of VMware's publicly traded shares as investors have the option of holding either the tracking shares or the VMware common shares traded publicly. The purchase price represents an approximate $27 %$ premium over EMC's trading price just prior to the announcement of the deal. ${ }^{43}$

In the past, tracking stocks have often performed poorly, particularly when they were linked to the performance of nonpublic companies. Why? Governance issues can be greater for firms with highly concentrated ownership and more opaque financial reporting. Tracking stocks tend to underperform the overall stock market in the years immediately following their issue. This has been especially true of private firms not subject to the discipline of public investors. Moreover, tracking shares usually have inferior voting rights-or none at all, and holders often do not receive dividends.[^1]