After a year-long saga in which a shareholder vote on going private was delayed three times because of investor unrest and multiple hostile takeover attempts were fended off, technology giant Dell finally closed its $25 billion leveraged buyout on Oct. 29, 2013. It was the largest U.S. company, in terms of revenue, that ever exited the publicly held arena.
A year later, things are different at Dell, though much is also still the same. The company’s CFO at the time of the deal, Brian Gladden, plus several other senior executives, are gone. Dell, which like other computer hardware makers suffered a profits plunge in 2013, claims to have reversed that course. (There is no public record of that, as the company is reporting its financial results — confidentially — only to current and prospective debt holders.)
The most important difference of all, new finance chief Tom Sweet told CFO two days before the anniversary of the deal close, is faster decision making. Not only is Dell freed from the many regulations applicable to public companies, but chairman and CEO Michael Dell now controls 75% of its shares. For the most part he can decide what he wants to do, and do it, without having to negotiate around external influences.
That underscores the company’s main purpose in going private, according to Sweet, who was promoted to the top finance spot last January after serving for two years as Dell’s controller and, before that, five years as chief accounting officer. That is, a necessary effort to transform the company from a computer hardware manufacturer to one that also has significant positions in software and IT services, which it undertook in 2008 and is still pursuing, can proceed much more quickly.
Still, the transaction clearly was a big gamble for Dell, which took on $17.5 billion of new debt amid a broad reshaping of the technology industry, with multiple forces undercutting the company’s business.
In his interview with CFO, Sweet discussed the deal, the changes at Dell and what’s remained the same. An edited transcript of the discussion follows.
What was the nature of your involvement in the LBO?
There were about four of us, including Brian Gladden, who did most of the work — the due diligence with various private-equity firms, putting together the documentation for the debt offerings, taking a new look at forecasts, you name it.
With a deal like that, you need a clear framework around how you’re going to approach it and who’s going to be involved. One priority is ensuring that the organization doesn’t get distracted. The transaction took 15 months to complete, but the business needed to continue to move forward. So we walled off the team that worked on the deal and tried to shelter the rest of the organization to ensure people remained focused on what they needed to do.
Did you have any prior experience doing those kinds of things?
I started my career in public accounting, so I’d taken companies public. This was my first experience taking a company private, and it was extraordinarily interesting. For example, there were the dynamics around governance and the board’s mechanisms to ensure that we ran a clean and fair process, and getting deep with the private-equity firms on their levers of value and how they thought about the business.
It was also interesting to see activists, like Carl Icahn, move into the stock, how he looked at the transaction strategically and his use of the media and other communication channels to put his position and message out there. The shareholder votes offered drama. We never thought it was going to take 15 months to get it done, but I learned a lot along the way.
How is the company acting differently now that it’s private?
There’s fundamentally nothing that we’re doing as a private company that we could not have done as a public company. The difference is all about depth and breadth and speed — the speed of decision making. We can go faster on the transformation journey in a private setting.
We’re also making better investment decisions on a longer time horizon. We’re thinking about what’s the right three-to-five-year answer, versus how this affects us in the next 90 days relative to an earnings-per-share target. We’re taking some risks, trying some different things without having to worry about public perception or impact per quarter. That’s been a bit liberating.
You’re citing speed as an advantage but at the same time lengthening investment horizons?
Yes. For example, our cyber-security business, SecureWorks, is growing double digits, in fact in the high 20% and low 30% range, in revenue year over year. Earlier this year we made the decision to give them this mantra: We want you to grow even faster. I don’t care if you generate any operating income this year, but I want you to grow as fast as you can and hire as many people as you need for the next two years, and probably beyond that. All I want you to do is be one dollar positive on cash flow. That’s it. One.
I’m not sure we would have done that as a public company. We’re probably going to hire 2,000 or 3,000 people in the next year. It’s a big leap.
How about you as a CFO? What are you doing, compared to what you would have done if Dell was still a public company?
Roughly 80% of what I do hasn’t changed. We’re still doing SEC-like financial statements and quarterly earnings calls, but with debt investors and analysts rather than the equity side. We’re also still running a Sarbanes-Oxley program around financial-reporting controls. We’re a big multinational company doing business in more than 120 countries, so we need strong reporting and controls.
What has changed is how we’re thinking about financial metrics. As a private company, we’re pretty focused on cash flow and cash management down to the business-unit level. Ultimately that’s the true test. We ensuring that the businesses are growing, but we want profitable growth, not empty-calorie growth. And, by the way, you can grow and be profitable yet have liquidity restraints. So we’re watching liquidity metrics around the businesses, along with cash-flow generation, as we build out our management scorecards.
Is anything different from what you’d anticipated?
I thought I’d spend more time with the financial institutions, that they might perhaps be more intrusive given the debt we put on the balance sheet. I thought they’d be my new best friends. And while I do talk to them quarterly, and they call occasionally, they’ve been good to deal with.
Now, I’ve got to be realistic. We’ve had good results. If they weren’t so great I’d probably be getting more help. But we’re growing, and profits are up. And we’ve paid down roughly $2.5 billion of debt so far. De-levering the balance sheet is a focus for us, as we have a vision of building back to investment grade-like metrics over the next couple of years.
Are you saying you foresee going public again?
It’s early. We’re only a year into this. I know that Michael enjoys running a private company. You’d think that [private equity partner] Silver Lake will exit the investment at some point, but they’re committed to being in it for the long term. So it’s unknown at this point in time.
The team has come to me a few times and said hey, as a private company we could potentially do this or that. But if you thought you were ever going to go public again, would you really do it?
You’re talking about whether to use a private-company version of GAAP?
Yes. This is a very personal opinion, but I think one GAAP is probably fine for us. A danger in being a private company lies in transition points, if you want to go public. How would you transition to public-company GAAP? What does that look like? Over what period of time? I think there are still questions about that.
Staying on the accounting theme, does the increased speed you talked about allow you to close the books faster?
We were already pretty fast. Generally we closed on a global basis within six days from the end of a quarter. We’ve actually slowed down a bit. We’re now closing in seven or eight days, though the rhythm is roughly the same.
You want to close quickly but also thoroughly. If I gave the team three weeks to close, I think they’d probably take three weeks. If I gave them 10 days, they’d take 10 days. It’s about ensuring that we have the right balance between pace of close and quality of close.
How do you describe the company’s transformation?
PC hardware is still a big piece of our business. But Michael set out a goal for us in 2008 to transform ourselves into an end-to-end solutions company. Over the last five or six years we have built out a pretty large software business. It will be roughly $2 billion in the next year or so.
We have a large data center and enterprise business with world-leading technology and servers and storage. We have diverse services capabilities around managing data centers, business process outsourcing and consulting. We’re also a large provider of cloud infrastructure, and we have many customers that want to move to the cloud but more in a private environment. So we build out private clouds for them.
Is the intention to diversify your business, or position yourself as a one-stop shop?
We like the idea of saying to customers, we can do all of these things for you or some of them. But we believe that offering an end-to-end solution, from PCs to data centers to software to services, is the right strategy.
Hewlett-Packard, your top competitor, is taking the opposite approach with its breakup. What’s your view of that transaction?
It’s a complex transaction, and an interesting strategy, and it’s going to take some time. They’re thoughtful people, and I’m sure they’ve thought a lot about this, but we want to have that full-solution capability. We’ll see how that transaction progresses. It’s a tough one to do.
As you noted, you’re still very much a hardware company. The PC market has fallen way off in recent years. What’s your perspective on that market?
Well, it’s been a reasonably good first half of the year. For a while we’ve heard that the PC is dead, and tablets and smartphones are taking over the world. Those are important computing devices, but we still believe that work gets done on laptops and desktops. People create on those form factors, which by the way will continue to change. So, a tablet with a keyboard is effectively a notebook — assuming it’s got the right computing power. That’s the nature of the industry, that form factors always migrate and change.
The forecast for PC hardware and data center hardware is that there will to continue to be a moderate refresh cycle over the next 18 to 24 months. Also, the macroeconomics have come back a bit. Europe has softened, but most world economies are doing better. We’re reasonably confident about the stat of the hardware market over the next few years and are continuing to build out our footprint and customer base.
David M. Katz contributed to this report.