The recent disclosure made by Dell Inc. (DELL) confirms that the tech major will be paying penalties to the tune of $100.0 million in settlement of the charges for its accounting fraud related to disclosures filed by the Securities Exchange and Commission (SEC).
Previously, the market watchdog, SEC accused Dell of providing misleading information to the company’s investors after receiving money from the largest chip manufacturer Intel Corp. (INTC). This has in turn helped Dell to boost its quarterly earnings statement, which helped the tech major deliver inflated numbers, thus exceeding market expectations.
Dell has reached an agreement with the “Securities and Exchange Commission” (SEC), whereby the company is in the process of resolving all allegations against the company’s CEO, Michael S. Dell, relating to financial discrepancies. In the recent settlement, the company did not admit or deny the allegations, but agreed to pay the penalty imposed. This apart, Dell’s chairman and chief executive officer, Michael S. Dell and Kevin Rollins, the former chief executive, agreed to pay a $4.0 million penalty each.
Mr. Dell will continue to function as the Chairman and CEO of the company, and this settlement won’t disturb his functioning in the company. This incident dates back to the year 2007, when a class-action lawsuit was filed by Dell’s investors, alleging that the company had been illegally receiving $1 billion a year from Intel for buying its chips exclusively from Intel and unlawfully blocking out Intel’s competitor Advanced Micro Devices (AMD).
The amount to be paid by Dell will not impact earnings in the upcoming quarter, as Dell has already made a provision of $100 million, which is expected to take care of all the settlement expenses relating to the Securities and Exchange Commission” (SEC). Dell believes that the recent settlement will resolve the long standing issue and allow the company to proceed on the growth path.
Keeping pace with the economic recovery, Dell has improved its performance over the last two quarters. Dell reported strong first quarter numbers, with EPS exceeding the Zacks Consensus Estimate, although revenue remained flat sequentially. The EPS was also better than in the year-ago quarter.
New products, a stronger services business, opportunities in the Electronic Medical Record sector and the company’s smart phone initiative are positives. Additionally, Gartner’s increased 2010 PC shipment numbers will also benefit the world’s number-three player.
While Dell’s performance in the consumer segment of the market has been less than desirable, the company’s relatively stronger position in the commercial space is likely to work in its favor now that the consumer market is softening.
Dell also has a huge cash balance, which provides it the financial flexibility to pursue any growth strategy, including acquisitions.
The acquisition of Perot Systems has expanded Dell’s customer base and opened up cross-selling opportunities. The company followed up this major acquisition with a couple of smaller names, such as Scalent and Ocarina. Both these acquisitions are intended to improve the company’s position in the cloud computing space, where it currently lags peers, such as International Business Machines (IBM) and Hewlett Packard Co. (HPQ).
We believe small tuck-in acquisitions, such as these are likely to continue, given the changing nature of the marketplace and the company’s lofty growth expectations of its enterprise business. We take a wait-and-see approach here, since Dell has a long way to go yet, in our opinion.
Overall, we feel our Neutral recommendation on Dell makes sense. We also believe there will be limited movement in the shares over the next few months, which is the reason for our short-term recommendation, or Zacks Rank of #3 (Hold).
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