*NEWS*DELL’s FOUNDER RETURNS AS CEO

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Dell’s founder returns as CEO as Rollins quits
Facing a deepening strategic quandary at the personal-computer giant he founded more than two decades ago, Dell Inc. Chairman Michael Dell took over the role of chief executive at the company, replacing Kevin Rollins, his former protégé.Mr. Dell’s move to reassert control over the company he transformed from a start-up in his college dormitory room into one of the world’s largest PC makers, is a sign of the crisis facing Dell.The Round Rock, Texas, company — known for its business model of selling PCs directly to consumers and business clients over the phone and Internet — has stalled in the past few years as buying behavior in the PC world has changed drastically.Mr. Dell’s renewed day-to-day involvement in the business may do little to solve the company’s problems, at least in the short term. In announcing the shake-up, the company also disclosed it expects its earnings and revenue for the fiscal fourth quarter ending this week to fall short of analysts’ estimates.Track Dell and other stocks on the move. Most actives, gainers and losers and the full Markets Data Center.Dell’s reversal has taken place largely since Mr. Dell handed the CEO reins over to Mr. Rollins in 2004. Mr. Dell remained chairman of the board, a position he will continue to hold. In an interview, Mr. Dell largely declined to comment on Mr. Rollins’s departure. Mr. Rollins couldn’t be reached.”Kevin has been a great friend and colleague for many years and made huge contributions for the company during a critical period. …I felt that it was a critical time for the company and having unified leadership would be the right approach,” Mr. Dell said. The 41-year-old executive added that his role as CEO would be a permanent one, and not an interim measure.Yesterday’s management shake-up “doesn’t change Dell’s problems,” said Ken Smith, director of technology research for Munder Capital Management. “Michael Dell or whoever you put in that role I think is going to struggle with the same issues.”

Customer Preferences
Dell’s market share has suffered in recent years as customer preferences have changed and competition has intensified. Much of the recent growth in PC demand has come from consumers buying laptop computers at electronics retailers like Circuit City Stores Inc. and Best Buy Co. Dell, which largely focuses on selling desktop computers to businesses, has missed out on the boom.Meanwhile, Asian rivals like Lenovo Group Ltd. of China and Acer Inc. of Taiwan have gained ground in the global market, and a resurgent Hewlett-Packard Co. recently surpassed Dell to become the world’s largest PC maker in terms of units sold, according to some research firms. The PC industry remains cutthroat. Pricing pressure is keen, and new products quickly become commodities.By helping keep costs low, Dell’s direct-sales model used to give it a price advantage over competitors such as H-P, but as H-P has restructured and the average selling prices of PCs have plummeted, Dell’s aggressive pricing hasn’t brought it additional growth. The company has since said it is focusing more attention on profits, rather than pricing.Mr. Dell indicated in yesterday’s interview that he didn’t plan to change Dell’s strategic model and would stick to selling PCs directly, adding that there are opportunities to innovate on the model. “Dell has always had a strength in its supply chain, and I think there is an opportunity to do even better there,” he said.Dell isn’t the first PC maker that has struggled after its founder vacated the CEO spot. But the track record of the founders who have returned to their old posts has been mixed. Steve Jobs, who reassumed the role of CEO at Apple Inc. in the late 1990s, following more than a decade as an outsider, rejuvenated the Cupertino, Calif., company by moving it beyond its computing roots and into the broader market for consumer electronics. On the flip side, Ted Waitt, the founder of PC maker Gateway Inc., was unable to arrest the company’s slide after he returned to the helm there in 2001.Mr. Rollins’s departure from Dell represents a sharp turnabout for the 54-year-old executive. As recently as late last year, Mr. Dell had publicly endorsed him as CEO. But under Mr. Rollins, Dell has faced a growing catalog of problems.The computer maker has missed several sales or earnings projections over the past few quarters. Last year, Dell also grappled with the recall of several million defective batteries in laptop computers. And the company disclosed in August that the Securities and Exchange Commission was looking into its finances. While the company has given few details, it has said the inquiry is related to “accruals, reserves and other balance-sheet items.”The company delayed reporting its most-recent quarterly results, attributing the delay to the “complexity” associated with investigations by the SEC and the U.S. attorney for the Southern District of New York.

Refresh Its Ranks
In recent weeks, Dell has moved to refresh its executive ranks. In December, Dell said Chief Financial Officer James Schneider was resigning and would be replaced with Donald Carty, a Dell board member and former chief executive of American Airlines parent AMR Corp. Dell also said last month that Senior Vice President John Medica would retire in the next few months.In the meantime, Dell has brought in new blood, including Steve Schuckenbrock, a former co-chief operating officer of Electronic Data Systems Corp., and executives Rick Becker and Richard Conrad from H-P.Mr. Rollins, who first joined Dell as a Bain & Co. consultant, was the architect of the company’s rapid growth in the mid-1990s. He won Mr. Dell’s respect by crafting a marketing strategy around individual business units, such as health care, state-and-local government, education, and small businesses. These targeted units allowed Dell to consistently outshine its competition in the mid- to late 1990s.They also allowed Dell to quickly collapse its accordion-like structure when the PC market stalled earlier this decade. The company was able to bounce back when a severe downturn forced Compaq Computer Corp. and Gateway into mergers to survive. Mr. Rollins was also known for persuading Dell to leave the retail market in 1993, arguing that direct sales were more cost-effective.But Mr. Rollins was also known as a stern and aloof manager. Early on, he was the executive who strictly enforced the Dell model of using cost cutting to gain market share and lift profits. Executives who disagreed with the approach were forced out or left. When the PC market slowed down earlier this decade, Mr. Rollins drove Dell into printers and consumer electronics, hoping to show its low-cost, high-velocity model could work in other markets. Neither move helped reignite Dell’s once-rapid growth.Investors and analysts also say Mr. Rollins made a mistake by not building and selling products with microprocessors from Advanced Micro Devices Inc., instead sticking solely with Intel Corp. chips. The company’s loyalty to Intel cost it market share in late 2005 and 2006. The company eventually relented and announced plans in May to begin shipping some products with AMD processors.Executives who clashed with Mr. Rollins felt he was sowing the seeds of Dell’s current problems. By forcing out those who championed other approaches, they said, Mr. Rollins would never be able to adapt to a new business model.Mr. Rollins was perceived as lacking the same charisma that Mr. Dell exuded. After Mr. Dell first began to distance himself from day-to-day operations earlier this decade, Dell went to great lengths to soften Mr. Rollins’s image internally. A classically trained violinist, Mr. Rollins dressed as a cowboy and played “fiddle” music at one company meeting.Mr. Dell is known for being a more hands-on manager, and often walked around Dell chatting with employees and popping into product groups, according to people familiar with the matter.

Final Straw
Internal dissatisfaction had mounted with Mr. Rollins lately, say people familiar with the matter. The final straw was the fact Dell has been beaten so badly in the marketplace recently by H-P. “The computer business is the business” for Dell “and they’re losing share of the computer business,” one knowledgeable individual said. This person added that Mr. Dell had no reservations about reassuming the top post.In recent weeks, Mr. Dell kept his dissatisfaction with Mr. Rollins relatively close to his vest. A Dell acquaintance who spoke with him last week says he gave no hint of Mr. Rollins’s imminent exit.Now that Mr. Dell has retaken the No. 1 spot, “the management team will feel more empowered,” the acquaintance said. Mr. Dell “is more of a motivational leader than Kevin,” this person added. “He will bring a new sense of urgency to the company.”In his role as chairman, Mr. Dell spearheaded some of the company’s newest ventures, including its foray into the gaming market with its acquisition of Alienware Corp. last year. Outside the company, he has been involved with the Dell Family Foundation, a child-health and education charity, and with MSD Capital LP, his private-equity arm.As CEO, he is expected to try to fill the post of chief marketing officer. Dell has sought a marketing chief for nearly three years and seriously wooed three candidates. None of those contenders were willing to join Dell because the job description “was too nondescript,” says another person familiar with the situation. Dell officials told the prospects, “Come here. We’ll figure it out.”But with Dell suffering from so many problems, Mr. Dell “is going to have to nail things down if he wants to get top people,” added another person close to the matter.In a further effort to attract new blood, Dell has hired recruiters Spencer Stuart to fill the newly created post of head of its global consumer business, according to individuals familiar with the situation. The search, which was approved jointly by Mr. Dell and Mr. Rollins, isn’t expected to be affected by the CEO switch. Spencer Stuart declined to comment on the assignment.Chirag Vasavada, technology analyst for money-management firm T. Rowe Price Associates Inc., said that Mr. Dell’s return as CEO signals to Wall Street that the company is serious about improving its performance. But Mr. Vasavada said that for its stock price to improve, the company ultimately needs to increase sales and profits.Nirav Parikh, an analyst with Los Angeles-based TCW Group Inc., a Dell shareholder, added that it was “somewhat obvious that there needed to be some changes at Dell.” He said Mr. Dell would be closely watched to see if he follows through on his plans for reinvigorating the company. “He’s been there all along, so what he is going to do is more important than just him taking control.”

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February 2, 2007 at 11:40 AM