Dell Disdain a Long Time Coming

In a filing with the SEC, it was revealed that one-fourth of Dell (Nasdaq: DELL  ) shareholders withheld support for CEO and Chairman Michael Dell at a recent meeting.

Dell CEO and Chairman Michael Dell is under fire from stockholders who aren't pleased with the company's performance over the past five years.

The number is as high as it has ever been for Dell and is a clear warning sign that many stockholders are not happy with the company's sinking value. Since 2005, the stock price of Dell has decreased approximately 66 percent. In August of 2005, it was at $24.45 per share. It was at $12.19 at the close Wednesday. By comparison one of Dell's biggest competitors, Hewlett-Packard (NYSE: HPQ  ) , has seen its stock rise approximately 56 percent in the same time period.

"The big reason is the stock," Jayson Noland, analyst at Robert C. Baird said. "Dell has substantially underperformed in comparison to IBM (NYSE: IBM  ) , HP, and Apple."

Noland says the stock has lagged because of Dell's lack of ability to adapt to a changing world. The company's build-to-order PC model, which brought them to the top of the industry in the mid 2000s, is passe.

"Really it's nothing that Michael or Dell has done. It's what they haven't done. The world has changed around them," Noland said. "The industry has shifted from the build to order model to the low cost, high inventory way of business. Buyers don't care what kind of DRAM they have on their computer anymore, they just want a good product that's cheap and with notebooks, they want to buy it off the shelf."

Competitors like HP, Acer, and Apple have turned to the foreign market for original design manufacturing (ODM) purposes. Noland says the Foxconns of the world have made PC manufacturing a much cheaper business than if it was done in the U.S. Dell has been reluctant to go down that path and as a result, the slow start into outsourcing ODM likely means at best the company can get on par with its competitors.

"They won't be any better," he said. "They can try and differentiate from a design standpoint, but that's not something they are good at."

Another reason for Dell's long decline is its lack of diversification. While the company has tried to turn the corner on that aspect, such as its recent acquisition of storage vendor 3Par, it still lags behind HP, IBM, Oracle, and a few others, says Noland.

"The PC market has been exposed the last few years. HP has a bunch of other services and profitability streams. In terms of operating profit, PCs are 50 percent for HP. For Dell, PCs are two-thirds of their profit. They (Dell) don't have a lot of intellectual property. They are trying to change that but it takes time," Noland said.

Ashok Kumar, analyst at Rodman & Renshaw, agreed Dell's potential transition could take several years. "Michael Dell has a tough hand of cards. The industry is transitioning away from the classic model. He's making acquisitions, trying to transform the company. It's not an overnight thing," Kumar said. "It's your classic case of two steps forward and one step back."

Part of the problem, Kumar says, is the lack of a "single bullet," one area the company can use to vault itself back to the top. He says the company lacks the scale of Acer, the breadth of products HP and IBM have in the enterprise sector, and it doesn't have a fighting chance against Apple on the consumer front, at least in the tablet sector. As a result, "They are caught in no man's land, trying to figure out what they want to be when they grow up."

As far as Michael Dell is concerned, Noland speculates there could be a similar situation to 2004 when Dell stepped down as CEO but remained as chairman. After a three-year hiatus, Dell returned to the operational post in 2007 at the request of the board. "It's been done before," he said.

Kumar says Dell could take the company private, regroup and come out a better company. However, he said it's more likely Dell will continue to make small acquisitions and build upon those.

In an email a Dell spokesperson said, "The Dell Board of Directors recently expressed unanimous confidence in Michael Dell's leadership and the majority of shareholders last week reelected Mr. Dell to the board."

International Business Times, The Global Business News Leader

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