Courtesy of Karl Denninger at The Market Ticker
Dell Is Well-Capitalized?
July 14 (Bloomberg) — Dell Inc., after cutting spending, raising money in the debt market and temporarily suspending its share-buyback program, says it is reviewing alternative sources of capital as customers continue to curb technology purchases.
Wait a second – I thought these technology companies didn’t have any material amount of debt and were doing ok, even with a slower economy?
The world’s second-largest maker of personal computers has to fund some of the growth in its financial-services unit and will likely need to provide more capital to the business later in the year, Chief Financial Officer Brian Gladden said today. The unit provides financing to customers who buy Dell products and services.
Ooooooohhhhhh… as in "oh oh."
Lucent anyone?
Hmmm….. how’s the credit quality in that portfolio Michael? Lates? No-pays? Charge-offs?
One nasty for a tech company – if you wind up foreclosing on a client with a lease or purchase deal, the "collateral" is lucky to fetch 50 cents on the dollar – even as little as six months to a year after delivery. Beyond two years its generally scrap.
One has to wonder how much of DELL’s "growth" was really growth and how much of it was driven by financing – you know, levering up your customers by internally covering their debt, issuing cheap debt on your own balance sheet to fund your financing activities?
The health of such a strategy and its impact on you is entirely dependent on your credit underwriting. If it bites (or is non-existent) then when the economy turns their "boom" becomes your "boom".
It will be interesting when DELL reports earnings – hopefully we’ll both get some color on this and the so-called "analysts" will grill the company on this point, as problems in the customer financing unit can literally sink you.
Think not?
Talk to Lucent.
Oh wait – you can’t – they’re gone, folded into Alcatel which is itself trading around $2.
Disclosure: No position; if I’d seen this one coming I would have been short up to my eyeballs.
