Dell is a computing and electronics company that was started by Michael Dell when he was just 19 years old. Although Dell is now considered to be one of the richest Americans as a result of his company’s ability offer his customers customized PC’s at low costs, his company suffered from a scandal in 2007 that severely damaged business; in fact, the company was required to pay a $100 million corporate penalty in addition to a $4 million dollar fine that was issued to Michael Dell himself. Since then, the company has also faced issues with competition; they are no longer the best in their industry, falling far behind companies like IBM (Koenig). Although the actual Dell scandal occurred in five years ago, the company’s actions are now affecting their individual business and the market as a whole today. In fact, Dell is currently discussing a $24.4 buyout that would help solve their economic troubles.
The Dell scandal in 2007 was particularly damaging to the market because it involved accounting fraud that misled investors (ComputerWeekly). According to a ComputerWeekly article published in 2010, the fines that Dell paid to the US Securities and Exchange Commission “relate to fees paid between 2002 and 2006 by chipmaker Intel to remain the sole supplier of some microprocessors after Dell said it would buy chips from Intel’s rival AMD.” These payments represented up to 76% of Dell’s operating profit; it was these payments instead of actual profits that allowed the company to obtain its goals. This was extremely detrimental to stockholders because if they had this information, they would have chosen to invest their money differently; they have a right to know about the company’s financial status. During the investigation, it was discovered that without receiving payments from Intel, the company would have missed the earnings per share consensus in every quarter during the period. Therefore, the SEC accused the company of using cookie-jar reserves to cover operating shortfalls. Once Dell broke off the agreement they had with Intel, their overall income fell by 75%.
According to the SEC, the accounting scandal occurred between the years of 2002 and 2006. In January 2001, just before the payments from Intel began, Dell was sharing each share of stock for $43.88 (open). When the scandal began in 2002, the stock dropped to $27.60; in 2003 the stock sold for $25.00, in 2004 it was $34.15, in 2005 it was $42.09, and in 2006 it was $30.01 (Yahoo! Finance). Although it’s difficult to determine the exact amount that the Intel payments were helping Dell based on the change in stock price over the years, there is a clear difference in the stock price in 2002 before the scandal compared to the stock price in subsequent years. In January 2007, around the time that the scandal was announced, Dell’s stock price decreased to $26.20, which is comparable to the price of the stock in 2002 before the payments from Intel began to take effect. Today on July 18, 2013, the stock of Dell was $13.12 at close. This scandal five years ago is clearly affecting the company’s performance today; it is evident that the price of the stock in 2013 is half of what is was before the scandal. It is interesting to point out that the company engaged in this scandal in order to help their business, but if they had chosen to forgo agreements with Intel, their business would be doing better than it is currently.
Despite the fact that this scandal occurred five years ago, it is still highly relevant to both the market, business, and the computing industry as a whole. Up until this point, Dell has managed to survive, although its stock has been dwindling. At this point, it is difficult to be sure whether or not the company will survive. Today, on Thursday July 18th, shareholders are currently voting on Michael Dell’s plan to make the company private, which he believes he would allow the company to turn around because they will then be able to make long-term strategic decisions without needing to conform to quarter-to-quarter expectations. While this action would save the company, it’s difficult to predict how the shareholders will vote. For example, Carl Icahn believes that the $24.4 million dollar offer undervalues the company. Since Icahn and his Southeastern Asset Management fund owns 13% of Dell’s stock, this vote may not work the way Michael Dell had hoped. If the company does survive, Michael Dell wishes to rethink his current business platform and expand the company to offer more diverse services such as business software and high end computers, using IBM as a business model.
Auditing & Assurance Services (with CD), 5th edition. Louwers. Richard D. Irwin, Inc., 2013. ISBN-13: 978-0-07-752016-8
ComputerWeekly. Dell fined $100m for accounting fraud that misled investors, 23 July 2010. Web. 18 July 2013.
Koenig, D. Shareholders voting on $24.4 billion Dell buyout, 17 July 2013. Web. 18 July 2013.
Yahoo! Finance. Dell Inc, 18 July 2013. Web. 18 July 2013.