Part I. Company Overview Dell Technologies Inc is a computer designer and marketer based in Hopkinton, MA. Dell is the third-largest computer hardware company by global market share. It holds a share of 15.9%, trailing HP (21.8%) and Lenovo (20.4%), but ahead of Apple (7%) and Acer (6.8%) (Dunn,2017).

Dell Technologies was created with the merger of Dell Inc and EMC Corporation. Dell Inc was founded by Michael Dell in 1984 in his dorm room at the University of Texas at Austin. The company's products were an immediate success, and by 1986 it opened a factory in Austin. The company rose to prominence in the industry, and by the time the Internet was born Dell was already a major computer manufacturer; the Internet boom allowed the company to launch into hypergrowth. Dell computers were for many years only available via ordering; there was no in-store distribution. This allowed the company to let consumers customize their own machines, something that appealed substantially in the marketplace. Foreign competition changed the dynamic of the computer hardware industry, with low-cost alternatives squeezing out some of the major players.

Dell's fortunes wavered for a time, the company losing market share. In 2015, it acquired data storage system maker EMC for $67 billion. This deal led to the creation of the current company, Dell Technologies, which competes in a number of related industries including information storage, backup and recovery, virtualization, security, cloud and of course computer hardware. The acquisition gives some context as to how to value Dell, not just by setting a price but also by bringing Dell's organization more in line with that of Hewlett-Packard, a major competitor in a number of different businesses.

The company is still working in the merger at this point. The 2017 fiscal year was really the first fiscal year with the merger, and even at that point the two companies were operating largely independent of one another. It can be a shock to integrate large, established companies too quickly, and it appears that Dell is taking a conservative path with this merger so as not to make any critical mistakes. So at this point, the merger itself is reflected in the company's finances, but most of the post-merger integration of the two companies does not appear to have taken place. This is also reflected in the financials of the company – Dell still is unprofitable and has not done a whole lot of cost-cutting to change that, perhaps hoping that there will be revenue synergies and that cost-cutting might only take place a little further down the line.

Part II. Microeconomic Environment

Dell markets computers to both consumers and enterprise. It generally focuses on the mid-market and premium segments, as the low-end is populated by a number of relatively generic manufacturers. Most of the products on the EMC side are enterprise products that are marketed and priced at a premium.

Most products exist in a somewhat competitive state, but close to oligopoly, around 3-5 major competitors. By competing on mainly at the higher end of the market, and focused on enterprise, Dell works with its customers almost as partners, providing them with a range of services, especially since the merger. Dell is able to bundle technology and software packages, and prices on that basis. Its major customers have long buying cycles, and while cost is a factor, are not strictly driven by cost. The PC market is a little bit different, as the product is largely commoditized. Dell seeks to differentiate on the basis of having best-in-class machines, and pricing competitively against the other players. If one compares a specific product, like the XPS 13, against its peers the approach for Dell seems to be to price with the rest of the market, or slightly above, but deliver a superior computer.

Dell's cost structure is largely variable costs. According to the latest annual report, variable costs were 75% of the company's total cost structure. One of the main drivers of success, research and development, is actually one of the smaller line items for Dell.

For Dell, the ability to control the costs of doing business, and ensure that it can achieve its margin targets are important. Because of the degree to which Dell competes for enterprise business, a major competitive move like a new entrant or merger could have significant implications about the competitive landscape. The PC business changes frequently, but seasoned Dell executives are well aware of the highs and lows of competing in the consumer PC market, where Dell has risen and fallen more than once.

Part III. Macroeconomic Environment

The current macroeconomic situation in the US is interesting. In general macroeconomic indicators are positive,...

Among the basic indicators, GDP growth is strong. Q3 2017 growth was at 3.3%, the fastest rate in three years (Mutikani, 2017). This indicates a bump, however, with the expectation that inventories will be depleted over the course of the next couple of quarters (Mutikani, 2017). Tightening labor markets are partly a sign of strong economic growth as well – the unemployment rate has been improving basically since 2009 and today stands at 4.1%, not far above the baseline level of systemic unemployment.
One interesting element is that real interest rates are negative, something that can definitely help to fuel growth, in particular in the form of inventory buildup in advance of an expected rate increase. Analysts believe that as many as three 0.25% hikes will be delivered by the Fed in 2018, to help cool the US economy (Ivanovitch, 2017). With economic growth picking up steam and interest rates still rock bottom and in need of a strong upward swing, the conditions today are similar to those in 2007, and economic analysts have expressed concern that we are close to a bubble (Clements, 2017).

The current tax plan that reduces corporate tax rates is probably the biggest piece of legislation that will affect Dell in the short run. Even with that, Dell has been running losses since the merger, and presently receives income tax benefit – a company with an effective tax rate of less than 20% stands to gain little from the proposal unless it becomes profitable, so in that sense even this change will not affect Dell. It might, however, make Dell's competitors more profitable.

Overall, the macroeconomic climate is generally favorable. Dell is definitely one of the companies that should benefit from increasing corporate spending. IT infrastructure is absolutely critical, and Dell's investment in EMC, which has several security-related products, should pay dividends if there are increases in cyberattacks that drive up demand for security products and consulting. On the whole, unless the economy actually does see a bubble burst, there are no red flags for Dell.

Part IV. Ratio Analysis

The key ratios for Dell are as follows:

2017

2016

Current Ratio

0.806949

0.931371

Quick Ratio

0.740396

0.867404

Debt / Equity Ratio

5.206271

29.70668

x Interest Earned

n/a

n/a

Gross Margin

21.02%

16.47%

Operating Margin

-5.28%

-1.01%

Net Margin

-2.71%

-2.17%

Inventory Turnover

10.17592

23.20136

Fixed Asset Turnover

10.9043

30.87386

Receivables Turnover

6.43758

10.41764

ROA

n/a

n/a

ROE

n/a

n/a

There are a few things that stand out from the ratios. First is the caveat that the company has not had an operating profit, much less a net one, during the past couple of years. So there are not ROA, ROI, ROE figures to report, and those respective margins are negative. The main point is then the gross margin, which improved from 16.47% to 21.02% in the year. This is attributable to the acquisition, as Dell before EMC was doing around16% of revenues in services, which have a higher margin, versus over 20% of revenue from service after the merger.

The second thing that one notices from the ratios is that certain aspects of the company changed quite a bit as the result of the merger. Most notably, the capital structure has transformed. Where the company prior to the merger had a debt/equity ratio of 29.7, it now has a debt/equity ratio of 5.2. This indicates that EMC was likely in a much better financial position than Dell at the time of the merger, which would be unusual, but it also shows that financially, the combined company is stronger. It has better margins, and while still not being profitable, has a more manageable debt load.

Also worth noting from the ratios is that the inventory turnover has lowered considerably, which is also a function of the merger. Dell has a fast inventory turn as its computers are typically made to order. EMC did not operate with this business model, so it carries inventories of its hardware, and so the merger caused the inventory turnover of Dell to shrink dramatically as its inventory levels increased. While the liquidity ratios are worse, this change is not significant. Dell's times interest earned could not be calculated because of its operating losses.

Part V. A pro forma income…