Dell Slashes & Burns, Right In Its Back Yard (DELL, AMAT)

Dell Inc. (NASDAQ: DELL) has announced additional actions in its previous restructuring in its attempt to smooth its operating model, rationalize its operations and improve profitability and cash flow.  In short, costs are coming down and many high-paid Austin workers are going to be out on the street.

Michael Dell has called this a $3 billion annualized savings opportunity over the next three years to drive both productivity and efficiency.  The actions will occur during Fiscal 2009 and beyond and are meant to accelerate growth in five focus areas: global consumer, enterprise, notebooks, small and medium enterprise and emerging countries, while improving profitability and cash returns.

Dell is based in Round Rock, Texas, what is now just thought of as another Austin suburb.  If you can believe it, Dell will close its desktop manufacturing facility in Austin, Texas.   The company also reaffirmed its previously announced plans to reduce global employee headcount by at least 8,800 and related operating expense.  In the last nine months of fiscal 2008, it reduced headcount by 3,200, excluding acquisitions.

Further cost cuts are coming, including design, manufacturing & logistics, materials, and operating expenses and benefits are expected to be realized in the second half of this fiscal year.   Those stock options haven’t been millionaire-makers for quite some time anyway.

It is also reviewing its current financial services ownership structure and is undertaking a strategic assessment of ownership alternatives for that part of the business. That primarily focuses on the U.S. consumer & small/medium business revolving credit financing receivables and operations, but may also include commercial leasing; although it notes that it is possible this will result in no change to the structure it expects to complete in Q3 of the current fiscal year.

Taking a closure maneuver of this size and magnitude is often met with public criticism.  Making those drastic cuts in your home town is a total slash and burn operation.  This almost sounds a lot like practicing live fire plane drops of Daisy Cutters, in your own back yard.

Austin housing probably just got cheaper.  Applied Materials (NASDAQ: AMAT) probably gets its pick of the working litter now. 

Jon C. Ogg
March 31, 2008

Jon Ogg produces the Special Situation Investing Newsletter and he can be reached at [email protected]; he does not own securities in the companies he covers.