Dell's Descent: Analysts Tiptoe Through Minefield
Dell continues its descent into some kind of financial hell, and analysts on the Street are getting increasingly frustrated by having to tiptoe through a minefield.
I wrote about this the first week of March, right before the company released its earnings, which were a mixed bag at best. But now, we get from the company the harshest language yet that Dell's finance office is beset by a lack of discipline, and maybe so much worse.
And now the concern is just how high this scandal may travel.
In the company's press release, Dell's internal audit committee "identified a number of accounting errors, evidence of misconduct and deficiencies in the financial control environment." Ouch. But beyond the big themes, the company's release announcing another delay in the filing of its annual report is shockingly short on specifics. And that could be a devastating warning sign.
Let's recap the timeline for a sec: Last August, Dell disclosed an "informal SEC inquiry" into the company. Trouble is, that informal inquiry had actually been going on for a year before Dell said anything. "Informal" turned "formal" a month later. Six weeks after that, Dell CFO James Schneider suddenly "retired." He was replaced in an eyebrow-raising move by board member Donald Carty, AMR's former CEO who was now chairman of Dell's internal audit committee investigating the company's financial activity. Some on the Street questioned how a guy investigating a department could then step in as that same department's new leader. A few short weeks later, CEO Kevin Rollins was shown the door, with some Dell watchers saying his unceremonious exit was at least in part tied to the ongoing financial investigation.
Pretty high-end fall-guys, if that's what they turn out to be.
Trouble for Michael Dell himself is Sarbannes-Oxley which holds a CEO and CFO responsible for the financial activity of the company. The formal SEC investigation stretches back to the early part of 2002. Michael Dell held the CEO title through the end of 2004. If the SEC finds wrongdoing, it could implicate BOTH Rollins AND Dell. Roger Kay at Endpoint Technologies doesn't' think Dell himself will be painted by the investigation. But he and the company are certainly being tainted by the investigation.
When Michael Dell returned to the company to succeed Rollins as CEO, he was heralded as the saving grace the company needed to get itself back on track. But if he's rolled up in the investigation too, it could forestall any chance of his turnaround gaining traction.
Call it a "Traction Distraction."
"I got indications from Dell management that essentially the magnitude of the problem is not that great. It is cosmetic, rather than structural. It will be annoying but they can clear it up. There will be probably be a back payment, fines, but they won't take the company under," says Endpoint's Kay.
"If it were the case that Michael Dell was somehow involved personally and might have to leave the company, certainly that doesn't mean for us that Dell goes away. I think it will sell more papers, a lot more scandal, but from a business model, and from a Dell business perspective, I believe structural changes are already underway," Clay Sumner at Friedman Billings Ramsay tells me. "
This side-drama is yet another distraction plaguing the sputtering company. A formal SEC investigation; the departures of Dell's top two executives; a class-action lawsuit alleging vast insider-trading; allegations of a billion-dollar kickback scheme involving Intel and that company's back-door payoffs to keep Dell from using chips from Intel rival AMD, a claim Intel has denied; and then of course, ongoing marketshare losses to Hewlett-Packard.
What's an investor to do? Sit on the sidelines or dump? This is a tough one. Dell is a big company with more than $12 billion cash and investments on the balance sheet. It clearly has worth. Value. But growth and margins are serious concerns and there are few voices on the Street saying this company can return to $30 a share any time soon.
"When you are dealing with companies and stocks that smell like there is a dumpster nearby, you have to really look at the balance sheet to start," says Tom Gardner, Motley Fool's CEO. This is a company that has more than $12 billion of cash and interest on their balance sheet. So this is not material from a financial standpoint. It is really reputational damage and I think this is something that Michael Dell has to demonstrate going forward that this company is going to do a world class job in reporting its results to investors."
The problem goes back to transparency. Dell has not yet communicated any specific strategic changes that will turn the company around. And there's a serious thirst for those specifics. Investors say one of two things is happening: there's a turnaround strategy in place and the company is quietly going about implementing it. Or, there are no details of a turnaround strategy because Michael Dell and his lieutenants haven't come up with one yet.
"We are not optimistic that Dell gets its Mojo back," says FBR's Sumner. "Since we don't know what Dell's stated plan is, buying the shares right now really to us represents taking a leap of faith. And with the business model changes and the margin implications that we think may be underway, in our view it's not justified right now to take that leap without at least knowing what the plan is."
Tough times for Dell that may get a whole lot worse before they begin to get better. "If" they begin to get better.
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