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By | Paul Kunert 21st June 2013 16:44

Michael Dell: 'Cash in your shares, we are in a mess'

And it's only going to get worse before it gets better, CEO says in SEC filing

Dell is such a risky bet that it's a wonder shareholders invested their hard-earned cash in the stock in the first place.

At least that is the impression given by Texan Mike, who outlined the challenges of remaining a PLC in an SEC filing as he steps up efforts to woo investors weeks before they vote on his $13.65 per share buy-out offer.

The famous PC baron has spent recent weeks on a tour of duty with channel partners, giving them every confidence that he will keep hold of the business he founded back in 1984.

Now he's trying to appeal directly to shareholders as D-day approaches – on July 18, anyone with Dell stock can vote on whether to accept the offer from Michael and chums, or if they prefer the latest concept from activist investor Carl Icahn.

In a short document entitled "the Rationale for a Private Dell", Mickey D said morphing into an enterprise solutions and service (ESS) biz is "critical" to its future standing as the PC market is "changing faster than anticipated," accelerated by tabs and cloud computing.

"Within the PC market, Dell faces increasingly aggressive competition from low cost competitors around the world and shifts in product demand to segments where Dell has historically been weaker."

Revenues at the ESS business are on the up, but Dell faces "ongoing integration and competitive risks," lest we forget its market share in that space "remains at less than one per cent."

Dell's services division benefits from pull-through from PCs and servers, making the organization more reliant on the performance of those declining product units.

And critically, "ESS operating income is growing – but not fast enough to offset decline in the core PC business," Dell said.

The erosion of margins in the x86 sector and a threat from IaaS cast a shadow over its volume server play, and storage sales have fallen since it ended the OEM deal with EMC, the filing stated.

Elsewhere in the enterprise, the networking market is expected to be "disrupted" by software-defined networking.

Dell is going to need "significant near-term investment" to successfully transform – filling gaps in the portfolio, boosting sales coverage, and competing in emerging market.

Making all these changes involves raising capital and operating expenditures, and sacrificing gross margin and squeezing operating margin, right under the noses of Wall Street moneymen. This will hit the dividend that investors make.

An indication of the pain could be seen in the last set of financials, it said, but "full implementation of the steps needed to position the company for the long term is likely to have an even greater negative impact on earnings in the near term than what we have already seen."

"A continuing decline in the public share price would threaten to adversely affect customer perception and make it more difficult to retain employees," the SEC filing added.

As a private company, M. Dell wants shareholders to accept his offer, claiming a private firm could jump into the transformation program and do less damage to long-term viability.

Addressing the concept proposed by activist investor Carl Icahn this week that Dell pursues as a defensive self-tender and remains listed, Dell said this move would leave his company highly leveraged.

He said it would "hurt the company's ability to weather an economic downturn", and would "not address the basic issues of remaining a public company".

He also said that the process of attracting investors to help him take the company private started last August, and he encouraged each VC that showed an interest to "submit as strong a bid as they could."

"The buyout is the right choice for the company, for our shareholders and for our team members and customers. I urge shareholders to vote in favour of the buyout".

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