Monday, January 5, 2009

Dell Turnaround Hits Bump

SAN FRANCISCO -(Dow Jones)- The departure of a management team hired to turn around Dell Inc.

On Wednesday, Dell announced the departure of global operations chief Mike Cannon and marketing head Mark Jarvis. Both men had been hired by Chief Executive Michael Dell to re-energize the company, which is in the midst of an ambitious cost-cutting program aimed at wringing $3 billion from its operations by 2011.

Dell also said Wednesday it will reorganize its commercial businesses into three areas: large enterprise, public sector and small and medium businesses, in order to service business customers better.

The departures come after a difficult year for Round Rock, Tex.-based Dell. Like other computer makers, it faces slower demand amid a global recession. Those customers still purchasing computers are increasingly moving downmarket to smaller machines with slimmer profit margins. The company has also had difficulty generating consistent profits from its consumer division and has seen its business with corporate buyers begin to shrink.

Since the beginning of the year, Dell's stock price has fallen 58%. On Wednesday, the company's shares rose one cent to $10.24.

Analysts said the departure of the two executives indicated the company's restructuring, which started in March, might be foundering. Cannon, who joined Dell in February 2007, was the point person for Dell's efforts to streamline manufacturing and outsource more of the company's computer production, and was expected to be with the company throughout the three-year restructuring. Jarvis was in charge of a corporate image makeover intended to promote the company as an innovator of cutting-edge products, rather than a discount maker of commodity PCs.

"We view major executive departures as negative given the implications around Dell's turnaround plans," Barclays Capital analyst Ben Reitzes said in a research note. "The executive departures could further indicate that Dell's turnaround plans are stalling."

Tim Ghriskey, chief investment officer of Chicago-based Solaris Asset Management LLC, said the executive changes and the broad restructuring are likely to further delay progress on the turnaround. He said the executive moves left him unsure as to whether Dell is abandoning its outsourcing plans.

"All we know right now is that there's some new people, and a new structure," he said.

Cannon will be succeeded by Jeff Clarke, who will become vice chairman of global operations. Clarke will also head Dell's business client product group. Jarvis is to be succeeded by Erin Nelson, who was previously vice president of marketing for Europe, the Middle East and Africa.

Dell spokesman David Frink said, "We believe the changes will enable us to move with even greater agility to provide our customers innovation and respond better to their ever-changing needs."

Dell has already reduced headcount by 10%, or around 8,800 employees, as part of its cost-cutting measures. It's also closing a desktop manufacturing facility in Austin, Tex., part of a plan to consolidate its manufacturing facilities. Frink said Dell is "well on its way" toward meeting those goals.

Shannon Cross, an analyst at Cross Research Group LLC, said in a research note she expects Dell will lay off more employees in the first half of 2009, but warns the restructuring could also hurt customer relationships, "which could exacerbate existing weakness in demand for IT hardware."

Dell's new consumer division hasn't delivered regular profits and growth in Dell's worldwide corporate and government divisions - which account for more than 80% of the company's annual revenues - dropped 6% in the quarter that ended Oct. 31. Total revenue for the quarter declined 3%, while profits fell 5%.

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