Dell as in the Process of Changing the Business - Case Study Example

Abstract Dell Company declared that initiator as well as CEO Michael Dell and venture company Silver Lake Partners have concluded their acquisition of the business. The leveraged takeover has lastly been completed following months of internal strife flanked by Dell and a group of depositors led by Carl Icahn, who uphold shareholders, were presented with an inequitable contract accepted by shareholders on Sept. 12, the $24.9 billion contract will disburse out the $13.75 per share together with a particular dividend of 13 cents per share. With the arrangement complete, Michael Dell can now redesign the business devoid of being subjected to quarterly inspection as well as with no restriction on the cash flow difficulty raised by security buybacks as well as dividend imbursement. Dell is in the process of changing the business . In ascertaining on the relevance of the acquisition by Dell and silver lake limited, the financial data as well as projection of cash flows and dividend is important since, the dividend discounting model, the residual income approach as well as the free cash flow method are some of the key valuation method that can be used in ascertain the value of Dell limited. The advantage and rationale of using the three valuation approach is that, it gives basis of making an appropriate investment decision as to whether the acquisition was relevant and worthwhile as well as considering other factors that might affect the company’s performance prior to takeover. Goals and strategy of Dell Company The company intends to invest heavily on research and development, capital expenditure as well as additional personnel in order to enhance end to end technology. The company anticipates that this would lead to an increase in the sales level as well as attracting new clients to the business. The company’s tactical plan of becoming an included supplier of end-to-end IT solutions is anticipated to necessitate extra speculation in joined infrastructure results software, cloud results, application expansion as well as transformation result Additional Sales personnel In order to increase on the level of sales as well as coverage and expand on the degree of partnership with channel partners, the company will hire additional sales personnel; this is attained by investing on training program for both new and existing sales personnel. the aim of this is that, the company ought to be secure in terms of financial position in order to curb the effect of economic recession that might affect business performance, in this regard, the company will be mitigating for risk as well as guaranteeing on business continuity during the period of economic hard times together with harsh competition from their rival client. The company working capital will therefore be ideal and consequently more stakeholders will be attracted to the business, this strategy is relevant in order to secure the business after the takeover strategy so as to avoid investment risk and loss consequential from the acquisition by Dell and silver lake firm. Competition The company intends to compete with developing states in providing the latest technology in the market. This in return will reduce the company facing the risk of financial inadequacy due to decline in the level of sales consequential from increased competition from their competitors. Some of the element of the competition entails product branding as well as product differentiation since, this will create customer awareness due to uniqueness as well as attractive package of the new product in the market, the company also intends to increase the level of sales by ensuring that the existing sales personnel are provided with the relevant training [program as well as the employing new [personnel to the business. this effort will boost on the level of sales and thus the company financial position will be secured. In this regard, strong financial situation depicts a strong liquidity of the company hence, the working capital of the company is going to fiancé the daily operation of the business. Dilemmas, issues, conflicts facing the company Dell had faced just the dilemma of specter no-growth when its center PC market starts to turn down about a year previously. Dell had taken the latest field course, mostly through an antagonistic purchase approach including at least 24 contracts from the year 2006. But there has been small center of attention to these buys: they array from high end processor, to network services and to data managing to as well IT services ( and many ,more service The shopping list therefore disclose no understandable visualization of what Dell required to complete with this buying extravaganza. The decline in the level of sales pose a threat to survivals of the business in the harsh economic situation and consequently, to get rid of the dilemmas, measure need to be put in place in order to increase the ;level of sales. some of the strategy ought to be adopted by the company is changing in product branding, increase the level and efficiency of their product to meet the latest technology as well as increasing on the level of sales globally in order to guarantee on the liquidity position as well as the effectiveness of the working capital. Prospect dream While Dell obviously acknowledged that it was not feasible as a reasonably priced computer corporation, with supply chain management as its major capacity, it come into view that the company is getting out to a broad variety of substitute dream of the prospect, it seemed as if  the business is spending lots of money on aim and innumerable time evaluating them as well as trying to incorporate them with no factual  logic of how the aim would assist generate a comprehensible value-add for a lately distinct Dell. Financial analysis about the company An ideal method of valuing Dell company’s share is relevant since the information generated by the model will be used in making decision of whether to invest in a company security or not. An ideal method is one that considers both the internal and external factors as well as considering the future performance of the company at present years. This will aid in avoiding future risk of business investment by ascertaining the business situation of the future at present years, a potentials investor will have considered both the systematic and unsystematic risk affecting the business and making a final conclusion of whether to invest in a company security or not. The following are detail analysis of Dell on the basis of the financial as well as the business situation of the company Revenue/Net income Growth It can be depicted that Dell Company is having a decrease in revenue growth in the year 2014 as compared to fiscal year 2013.this is due to the fact the company is facing dilemmas about the product as well as emergence of rival competitor in the market who provides product of highest quality that rewet customer’s expectation much more as compared to the company’s production. This implies therefore that the gross profit margin as well as the net profit margin will be low meaning that the working capital of the business is worse and thus the company is going to have a strong liquidity problem in financing its daily operation alongside the long-term investment. The company should strive to ensure that their sales level is up. This can be achieved b y increasing on the sales personnel as well as ensuring that the product meets customer’s expectation in terms of quality, standards and prices. Cash flow analysis based on the previous and current cash flows, it can be concluded that the company is going to realize return by way of profit from investment due to the fact that the company working capital is sufficient enough to finance the daily operation of the. The value of the company is high and consequently the liquidity position of the business will not put the company’s operations at threat since, the earning per share depicts an increasing trend. In this regard, the company is going to realize profit form Capital investment and consequently the going concern assumption will be relied upon in making investment decision on whether to invest on the business or not. Discounted dividend model The dividend discount model is a technique of valuing a company's stock price based on the hypothesis that its stock is significant to the sum of the entire of its prospect dividend expenditure, discounted back to their present value. The model consequently is used to ascertain the worth of the stocks based on the net present value of the prospect dividends Po= {Do/ke-g} Where Po is the intrinsic value, Do is the dividend last paid, Ke is the cost of equity and G is the growth rate This model would be appropriate in ascertaining the real worth of the company if the company paid a dividend and a growth of the same dividend is eminent. In this case, the company has been making profits for the last four years implying that dividend to shareholders was paid. Dividend last paid $0.08, Growth rate in dividend 8% Total number of equity shareholder 10,781 Intrinsic value of a share = (0.08$/10%-8) =$4 per share, Value of the company= ($4*10781) =$43,124 Total liability and equity $ 45,871 From the above analysis it can be concluded that the value of the company according to Gordon discounting model is quite low as compared to the worth of liabilities and equity which is 45,871.This is a strong indication that financial situation of Dell limited is at risk and urgent measures need to be undertaken in order to rescue the business performance of the company. In this regard, the takeover would mean that, the company will undergo a serious financial overhaul as well as considering some new source funds to finance the business and at the same time consider the adequacy of the human resource existing. These factors consequently will lead to an increase in the level of sales as well a reduction in the value of liquidity risk that Dell will be facing. Discounted free cash flow model Discounted cash flow valuations are one pricing approach that potential investors with expertise skills use to appraise the worth of stocks. Proponents of this appraisal technique argue that you can get a precise image of a firm's accurate worth only if you approximate its present and future cash flow. Other proponents argue that this valuation technique has numerous drawbacks that include the fact that the approximation are based on protrusion and forecast rather than concrete data. FCF= (operating cash flow-capital expenditure} Or FCF= {EBIT (1-Tax Rate) + Depreciation & Amortization - Change in Net Working Capital - Capital Expenditure} Dell limited FCF= (1,639.0 -322.0) =$1317 The Dell Company is having a high value of free cash flow, implying that the business is sufficient in terms of finance and thus the reserves will be used to finance future investment projects and thus the business is a going concern. Residual Income model The residual income model tries to change a firm's prospect earnings approximation, to recompense for the equity cost and place an extra precise worth to a firm. even though the return to equity holders is not an official prerequisite like the return to bondholders, in order to draw investors firms ought to recompense them for the investment threat exposure. In scheming a firm's residual income the major calculation is to conclude its equity charge. Equity charge is merely a firm's total equity capital grow by the required rate of return of that equity, The model can be ascertained as well using the capital asset pricing model {CAPM model} .The formula below depicts the equity charge equation. Equity charge= {Equity capital*cost of capital} Equity charge= {10,781*10%) =1078.1 Residual income Residual Income model The residual income model tries to change a firm's prospect earnings approximation, to recompense for the equity cost and place an extra precise worth to a firm (McMenamin 2002). even though the return to equity holders is not an official prerequisite like the return to bondholders, in order to draw investors firms ought to recompense them for the investment threat exposure. In scheming a firm's residual income the major calculation is to conclude its equity charge. Equity charge is merely a firm's total equity capital grow by the required rate of return of that equity, The model can be ascertained as well using the capital asset pricing model {CAPM model} .The formula below depicts the equity charge equation. Equity charge= {Equity capital*cost of capital} Equity charge= {10781*10%) =107.81 Residual income= {Net income-equity charge} Residual income= {292-107.81) =184.1 million Residual income= (equity charge-Net income) The company is having a residual income of 184.19 million which is quite high. In this regards, the company liquidity position is ideal and consequently, it depict that the business is a going concern due to huge capital expenditure. It can be concluded therefore that, the residual income valuation method is a practical and progressively more accepted technique of valuation and can be put into practice with no trouble by even apprentice investors. Residual income valuation can give a comprehensible approximation of what the true intrinsic value of a firm may be. Asset growth The growth in asset is positive as depicted from the above graph till 5/3/2013 then it starts to decline to date. In this regards, the return on asset and current ratio is positive then declines, in this regards The Company is having a weak financial position as depicted by its size of asset and market capitalization. The business therefore is not a viable investment opportunity since it depicts decline in asset capital which is an indication that the company’s liquidity position is not at steady growth rate. Detail report on the company performance and situation Potential investors (Dell and silver lake limited) therefore should consider the threat that will encounter in investing in Dell Company since the business situation of the company is unfavorable in terms of capital base and funds available for investment. In ascertaining the financial situation of the company using the free cash flow method, per share of 0.65 is envisaged (CFA 2010). This implies therefore that for every one share of potential investors, there is discounted free cash flow of $0.65.this is an indication that the business has financial difficulties despite the fact that the business is spending heavily on research and manufacture of their product. This is a strong warning that the business is facing liquidity problem though it is a going concern and will thus continue into unforeseeable future with uncertainty due to semi-strong financial position depicted by growth in asset as well increase in net cash flow and the growth in profit margin. An investor should therefore consider investing in shares on Dell limited risk since they will not get assured fully of positive returns in the near future from their investment in the company due to the fact that the business sis spending heavily on research and development and thus it is not certain whether the returns from investment will be sufficient enough to cater for capital expenditure amid the economic crisis as well as the growing completion from other companies. The residual income to the business depicts a negative value. This implies that the business is assuring low dividends due to the fact the business currently is placing more expense on capital investment for future returns to investors as well as the manufacture of the standard buildings that meets the technology at present. The investors will therefore waits for return from investment in the future in order to receive dividend. The shareholders of the business are certain about the financial position of the company due to the fact that the company is having a strong value of free cash flow. The financial position of the company is stable and thus potential investors are assured of their returns from investment. Conclusion An analysis is made on dell limited concerning the financial situation and business performance in ascertaining on the relevance of the acquisition by dell and private equity silver lake. The company is a having a huge investment on capital in order to earn a high returns in the future. This is envisaged by free cash flow analysis where the analysis depicts free cash flow high together with the residual income. It therefore implies that the business return will cater for investors return and will thus put investors into a safety by way of dividends from investment as well as opportunity for future capital investment. In this case a detail analysis on the company’s performance should be analyzed before making intent to invest in this company (Jerald E. Pinto 2010). The problem a rises when the business is reporting both a negative analysis in terms of the free cash flow and the residual income this in general depicts the difficulties the business will be facing in terms of financing the capital expenditure as well as considering the need for shareholders returns inform of dividend. In order for potential shareholders to realize investment in this company, Dell and silver lake firm will be forced to wait for a considerable time since the company is having a huge capital investment that can be realized in the near future. From the above financial analysis, it can be concluded therefore that the company is having a favorable business situation depicted by the residual income model and the discounted cash flow approach and thus, the takeover strategy will see the business booming in the prospect years. Though there are unfavorable trend in the level of sales and asset growth, the company depicts a going concern status and consequently, the takeover strategy was not ideal since, the stratagem deprived the shareholders the right to own Dell limited and instead be in the hands of the few individual. Reference list Cahill, M. (2003) Investor's Guide to Analyzing Companies and Valuing... CFA, H. (2010). Security Valuation and Risk Analysis: Assessing Value in. Gabehart, S. (2002). The Business Valuation . Jerald E. Pinto, ‎. H. (2010). Equity Asset Valuation . KEVIN, S. (2008). SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT. McMenamin, J. (2002). Financial Management: An Introduction -. Nick Antill, ‎. L. (2005). Company Valuation under IFRS: Interpreting and Forecastin. Read More