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February 3, 2007

Will Dell be saved by the Apple Rule?

dell_logo020307.jpgIt's been anything but a smooth ride for Austin-based Dell, Inc. since founder Micheal Dell announced that he was stepping aside as CEO almost three years ago. The saga came full circle this week as the company announced that Dell was replacing his replacement as CEO, Kevin Rollins.

Unfortunately for Dell investors, it's far from clear that Mr. Dell's return as CEO will have the same effect on Dell as the return of Steve Jobs had on Apple, Inc. Dell has several serious systemic problems with its business model that will be difficult and expensive to overhaul. Was Jobs prophetic last January?

Meanwhile, a class action shareholder's lawsuit this week hammered Dell, Mr. Dell and others with allegations of potential criminal wrongdoing. The lawsuit alleges that Dell's profits were inflated by hundreds of millions of dollars in quarterly rebates from Intel that Dell did not properly account for and disclose (sound familiar?). The lawsuit contends that Dell was receiving as much as $1 billion a year in what are characterized as "secret and likely illegal" kickbacks by Intel to ensure that Dell would use no other chip supplier. Of course, as these stories go, all of this was supposedly going on as Dell executives sold billions of dollars in Dell shares. Dell has already disclosed that the U.S. Attorney's office in New York has undertaken an investigation of its financial reporting, as has the SEC.

Intel paid these "e-Cap payments" -- standing for "exception to corporate average pricing" -- to induce Dell not to do business with Intel competitor, AMD. Dell spread out the approximately $1 billion a year received in such payments over the four quarters to reduce the company's cost of goods sold. The lawsuit alleges that Dell became so dependent upon these payments -- knowledge of which was apparently limited to about 15 senior people at Dell -- that Intel made the payments near the end of the Dell's quarters so that the funds would have a "direct, material impact" on Dell's reported operating and profit margins.

And, oh yes, the company's stock, which was trading in late 2005 at more than $40 a share, has fallen to $23.52 as of the close of Nasdaq Stock Market trading yesterday.

Gosh, haven't we seen this syndrome before? Can Dell avoid it's own Enronesque experience by offering up a few sacrificial lambs? And will those sacrificial lambs include Mr. Dell? Or will he be exempted from criminal liability by what Larry Ribstein has characterized as "the Apple Rule," which was not around to save another Texas business visionary who created wealth and jobs on par with Mr. Dell?

Stay tuned.

Update: Don't miss Larry Ribstein's comparison of the Apple Rule with the Enron Rule.

Posted by Tom at February 3, 2007 7:02 AM |


Dellís marketing strategy no longer seems to makes any sense. Who needs to purchase a special ordered computer? They are now commodity items and the features which were extraordinary only a few years ago---are now standard. I expect their situation to get much worse.

Posted by: Anonymous Author Profile Page at February 5, 2007 10:23 AM

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