Michael Dell and the art of the turnaround

Michael Dell stepped down from being the CEO of Dell in 2004 to spend his time on other activities. At that time, Dell was the world’s largest PC maker. But in the next few years, it all went to shambles as the company lost its vision and missed the transition from desktops to notebooks, product quality suffered, and customer service became worse and worse. 

Dell’s net profit fell by 72% in a single year in 2006! From 2004 to 2007, its stock price fell by 50%! Michael, who owned 16% of the company, lost a fortune!

And so, he decided to come back to save his legacy and turn the company around. And he did so in a spectacular style. He orchestrated to take the company private. Streamlined it again. And when everything was said and done, Michael ended up owning 52% of Dell, as well as 42% of VMware! His total value in Dell went from $4 billion to $40 billion!

Taking Dell private

When Michael came back in 2007, he saw the writing on the wall. Desktop computers had seen their peak. He would have to focus on other avenues to grow. But even as he grew Dell’s software business from $10 billion to $20 billion, Dell’s stock price declined further. Wall Street saw Dell as a PC company. Every dollar invested in R&D or in acquiring service companies or doing anything not related to core desktop selling was penalized by the investors! And so Michael decided to take Dell private.

He put up half a billion of his own money. Persuaded Microsoft to loan $2 billion. And got hedge funds and big banks to loan $18 billion more! And bought out all the private shareholders. Michael reasoned: it would take the same amount of money to service these loans as Dell was paying in dividends and share buybacks every year!

Once Michael was free from the Wall Street investors’ shackles, he became more aggressive. He got rid of a lot of quarterly metrics. And focused on only two priorities: 1. Cashflow. 2. Growth.

1. Cashflow

Two things are needed to improve the cash flow. Reduce expenses. And increase the earnings. Michael did a few things that he wouldn’t have been able to do without lawsuits in a public company. At that time, he was widely panned by critics for his actions. And a lot of people wrote him off because the measures didn’t make sense to outsiders.

Dell originally became famous for its made-to-order computers. Consumers could customize their computers as they wanted and their computer would be assembled “after” the order was placed. This however is very inefficient for inventory. So Dell did something that seemed ridiculous. They ditched the plan that made them popular in the first place. And started focusing on selling pre-assembled computers. 

They also cut costs by selling their plants outright. And having contracts in place to buy computers with fixed specs.

And yes, they famously charged their employees for coffee! Article after article was written on how these cost cutting measures would doom Dell. But Michael knew what he was doing.

2. Future growth

Along with milking his dying cash cow of personal desktops, Michael completely overhauled the internal structure of the company. Dell was organized based on customer needs and had 3 departments: direct consumers, small businesses, and enterprise big businesses.

Michael scraped the consumer oriented structure and focused on building the company around four operating units:

  • Personal computers
  • Servicing
  • Software
  • Servers and storage

In effect, Michael created 4 sub-companies under one roof. Because he knew that his cashcow of personal computers won’t be lucrative forever. And so he parlayed his cash flow to acquire a flurry of other companies.

Most notably, he took on further debt and acquired EMC and Vmware for a deal priced at around $67 billion!

In 2018, Dell became a public company again. In 5 years, it had quadrupled its market cap!

The three strategies anyone can use to turn their lives around

The three rules Michael used are applicable for everyone.

  1. Reduce expenses
  2. Focus on a cash cow
  3. Parlay the cash to bet on the future

Issues occur because people don’t go all the way to do what is required. They won’t cut expenses enough. Or they’ll find comfort in their current cash cow and will struggle when it dries up. Or they’ll only be future oriented and take crazy risks without proper foundation which makes any small failures also disastrous. To do it in tandem is difficult.

But that’s what is essential. 

Action Summary:

  • You have to make your old structures obsolete against all the criticisms and complaints. Because the things that got you here won’t take you to the next stage. So reinvent yourself. Kill the things that made you successful “before” it disintegrates.
  • Focusing on the cash cow and parlaying it for the future in tandem is the best strategy. Because it allows you to balance risk of failure with risk of complacency. And grow with a safety net.