Michael Dell Seals His Company's Fate

Yesterday's Wall Street Journal contained an article discussing Michael Dell's efforts to cut $3B from his company's expenses.

From my proprietary research on company performance, Dell has now entered a pattern that will leave it very little chance of outperforming the S&P in the foreseeable future.

The nearby, Yahoo-sourced chart displays Dell's last five years' performance, along with that of the S&P500 Index. The company hasn't outperformed the index for several years, and has underperformed significantly over the period.

My research indicates that companies which attempt to turn around from a formerly-successful, high-growth strategy have little chance of success.

Furthermore, the total return performance premium over the index shrinks dramatically from what it was in the company's better days. The result is a very minimal expected return premium from a shrinkage of the firm, followed by an attempt at a return to growth from its 'right-sized' base.

The second chart illustrates Dell's price performance since the late 1980s. It obviously roared past the S&P in its prime, but has flattened since the dot com crash of 2000. In effect, this decade has been a 'lost' one for the company.

At this late date, Michael Dell's attempts to cut his way back to superior performance is basically wrong-headed.

Sometimes, companies are just outdated, with business models which no longer merit investment.

Michael Dell would do himself and his shareholders a favor by declaring the end of the era in which his model excelled. Next, he should merge Dell with another retail tech product provider, or close it, and spare his shareholders further needless loss of their remaining capital.