How a leveraged buyout could actually turn Dell into the tech success story of the decade

Michael Dell knows something you don’t
Michael Dell knows something you don’t
Image: AP/Cliff Owen
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Tarkan Maner, Dell’s vice president of cloud operations, is shouting into the phone at me: “Investors are giving us some runway. We’ve got about 12 to 18 months. But if I don’t execute, your next interview will be with a different guy!”

Eight months ago, Maner was CEO of Wyse, an obscure but highly profitable company that had been skulking in the shadows of better-known enterprise information technology companies. Since its founding in 1981, the thesis of Wyse has been that most people don’t need PCs. Wyse produced “thin clients,” which are computers with very little processing power or storage, designed solely to connect to powerful mainframes and servers and, now, the web.

Before the internet, thin clients were a nightmare to operate. They required dedicated networks and the on-site maintenance of computers powerful enough to power multiple workstations at once. Now everything is a thin client, smartphones foremost among them. We stream video from servers thousands of miles away, carry on video chats whose streams are compressed by computers far more powerful than the ones in our pockets, and store our lives on redundant arrays of hard drives that span continents.

Facing this reality, Dell, which built its success on more traditional PCs, acquired Wyse last year. Now there is renewed speculation that Dell could take itself private in a leveraged buyout by private equity firms. “I really don’t know about these rumors,” Maner said last night. “I don’t think anybody knows besides the board and the CEO.”

Why Dell bought the anti-PC company

Wyse was a peculiar acquisition for what was at the time the world’s second-largest PC manufacturer. It’s an explicitly anti-PC operation. “Desktop computers are still ugly,” says Maner, articulating each word with the urgency of a rescue team shouting down a well. “They have tons of plastic, they are heavy. They are so big they usually don’t even sit on your desk. They should be called floortops!”

Wyse’s solution is called project Ophelia. It’s not clear what the reference to the suicidal noblewoman of Shakespeare’s Hamlet means, exactly, but one way to think of the project is: This is how Dell plans to kill its own PC division.

Dell’s project Ophelia squeezes an entire PC into a package small enough to fit into your pocket
Dell’s project Ophelia squeezes an entire PC into a package small enough to fit into your pocket
Image: Dell

Ophelia is as big as a USB thumb drive, yet it’s a complete, self-contained PC. It allows access to Windows, Mac OS, Google’s Chrome OS, Dell’s custom cloud solutions, Citrix cloud software, and even Google’s Chrome OS, using virtual instances of those operating systems running in the cloud. The stick itself runs Google’s Android operating system in order to handle tasks that are processed locally, like decoding and encoding voice and video streams. The entire device draws 2.1 watts of power; for comparison, the microprocessor in the average smartphone draws 1 watt, and the average PC draws 20 times as much electricity.

To use Ophelia, you plug it into a flat-panel monitor or television. That’s it: It connects to the internet via WiFi and to a keyboard and other peripherals via Bluetooth. It’s the PC-as-parasite, a device that offloads most tasks to servers in the cloud so that the user is left with barely a token, a nearly ephemeral, solid-state key connecting to their could-based “computer,” wherever they are.

About half of Dell’s cloud business consists of federal and local governments. The geeks who have to run corporate IT departments like solutions like Ophelia because they allow them new ways to secure the “computer” that workers are relying on. They also centralize maintenance and upgrades into servers. It’s the end, in other words, of in-person visits to your cubicle from the corporate IT guy.

Dell’s new competition: Google

If this business plan sounds familiar, that’s because it’s also Google’s model. Google’s entirely cloud-based Chrome OS and Chrome-based devices turn everyday notebook computers into thin clients that are designed to conveniently access Google’s alternatives to Microsoft Office and email software. In a way, Ophelia is just a more extreme realization of this vision.

Pricing for Ophelia isn’t public yet, but Maner says that “we want to start the product at $50.” At that price, he argues, even the world’s largest PC manufacturer, Lenovo, can’t compete. “And I’m still making 50% gross margin!”

Dell has always played the high-volume, low margin game, but lately it’s been losing that battle to the very Chinese manufacturers to which it outsourced so much of its manufacturing, including Lenovo. The key to the company’s transition is to get customers hooked on entirely cloud-based computing systems like Ophelia. Then, Dell’s business moves from selling commodity PCs to selling subscriptions to the security, storage, and other services that it has amassed after billions of dollars in acquisitions of cloud services companies like Wyse and, most recently, Quest.

Here comes the leveraged buyout

The problem with this transition is that Dell is still the world’s third-largest PC manufacturer, and despite major blows to its stock price in the past year, its valuation still reflects that. Dell’s cloud business is growing quickly but maybe not fast enough to prevent the company from contracting before it starts to grow again.

The growth of Wyse, before its aqcuisition, is typical of the 25% to 30% yearly growth many analysts project for cloud services companies. In 2007, the company’s revenue was about $30 million. In 2011, before the acquisition, the company was up to $400 million in revenue, with $250 million of that made in the last quarter of 2011. Maner insists that if the company were still independent, it would be making a billion dollars a year in revenue, shipping 4-5 million units in 2012 and seeing 40% to 50% growth in revenue per year.

Dell’s total revenue is about $50 billion a year and has been falling. Price wars over PCs, a market that is shrinking in the face of competition from tablets and other “post-PC” devices, have hurt the company.

Suddenly, the logic of taking Dell private starts to make sense. Dell has about $14 billion in cash. And while it has outsourced most of its manufacturing, the company still has all kinds of capital tied up in the infrastructure required to build and deliver PCs and servers. With the right owners, Dell could sell off the parts of its ailing PC business that still have some value, plow its remaining resources into becoming a company that sells services and software, and essentially do what IBM did when it got out of the hardware business almost entirely and instead became the world’s largest supplier of software and IT services to corporations and businesses.

Dell has a couple of advantages as it makes this transition. The first is that, unlike IBM, it doesn’t have to sell off all of its PC business, just the parts that it doesn’t need when offering complete systems—from data centers to individual workstations or even mobile devices—to its customers. Dell’s second advantage, over Google, is that the company has something like 100,000 “channel partners,” independent vendors who resell its services, and deep experience integrating into legacy systems. The world of consumer electronics may move at lightning speed, but the huge investments and enormous complexity of government and corporate IT systems means that enterprise technology does not. These organizations need a partner like Dell that can support their legacy systems for decades to come.

Dell’s final advantage could be that the company seems to be more prepared for radical change than, say, Hewlett-Packard. Going private will be by all accounts extremely difficult. Michael Dell, the company’s founder, still controls 16% of the company. But if Wyse, the anti-PC company, was a strange acquistion for Dell, and project Ophelia the most extreme expression of that ethos, then both are a measure of just how desperate Dell is to reinvent itself.

A privately held Dell, shielded from the pressure to post continual growth on a quarterly basis, could refocus itself on thin clients and cloud computing, which could set itself up for a breathtaking turnaround.

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