Why is Michael Dell cashing out?

The PC wunderkind is on a selling spree -- $2.5 billion worth of his company stock in less than two years.

Published August 31, 2000 7:00PM (EDT)

Michael Dell is rolling in greenbacks. So far this year, he has sold more than $1 billion in stock of Dell Computer, the build-to-order PC firm he founded 17 years ago in his college dorm. Last year, the e-commerce wunderkind cashed in shares worth roughly $1.5 billion. Top executives routinely unload company shares; after all, even absurdly wealthy CEOs need to diversify their multibillion-dollar portfolios -- or perhaps pick up another mansion, yacht or plane. But $2.5 billion in less than two years ... for one guy? That's a mind-boggling sum, even by new-economy economics.

And it's well more than the sums other tech execs with similar mega-holdings are shedding these days. So far this year, Steve Case, for instance, has sold $28.4 million worth of America Online stock; Meg Whitman has traded roughly $98.9 million of her eBay holdings; Amazon.com's Jeff Bezos pocketed about $20 million from a May sale; Yahoo CEO Timothy Koogle cashed in a paltry $11.4 million; Scott McNealy unloaded $22.5 million worth of Sun Microsystems shares; and Bill Gates -- the planet's richest man -- has made out with about $153 million worth of MSFT, according to Securities and Exchange Commission filings.

Other high-profile insider shareholders such as Oracle's Larry Ellison and Yahoo!'s Jerry Yang are far easier to track when it comes to their equity sales: Neither has parted with a single share since January.

Perhaps the only high rider who makes Dell's trades seem like chump change is Microsoft co-founder Paul Allen, who's dumped about $4.7 billion of MSFT this year alone, and has filed to sell another 12 million shares. But Allen no longer works for the software company, and for years has used the windfall to influence the direction of new technologies through his investment vehicle, Vulcan Ventures, and to simply tickle his own fancy with stuff like the Seattle Seahawks football team, a rock 'n' roll museum and a telescope to search for aliens.

Dell spokesman Jon Weisblatt insists there's nothing unusual -- or telling -- about his boss' billion-dollar profit taking. "He's not trying to divest himself of his holdings," Weisblatt says. "It's just routine for him to sell shares every quarter. It's just routine money management."

To be fair, the Austin, Texas, PC pioneer still owns 343 million Dell shares, worth an estimated $13.9 billion. His stock sales this year represent about 2.5 percent of his total holdings -- a higher percentage than Gates, who sold a mere .2 percent, and McNealy, who cashed out of less than 1 percent, but lower than Case's sale of 5.7 percent of his shares or Whitman's 4.9 percent sell-off. Besides, most financial planners attest to the importance of spreading one's wealth in various investments to offset risk.

But for tech entrepreneurs like Dell, to whom legions of investors have relinquished their faith (and money), selling so much stock seems like an ominous sign, since holding on to an enormous stake is viewed as a symbolic showing of confidence about the company. Take for instance, Ellison, who hasn't sold any of his 690 million Oracle shares, worth roughly $60.5 billion, for several years. It's not that the guy is frugal, but after you've cashed out a couple hundred million for Japanese-style mansions, multimillion-dollar jets, and an America's Cup yacht you don't really need a whole lot more. Besides, Ellison has so much faith -- or at least ego -- riding on the success of his company, he surely wouldn't cash out just to invest elsewhere. "Ellison is always very aggressive in advocating and promoting his company," says Donald Selkin, chief investment strategist at Joseph Gunnan in New York. "He always says he's going to pass Microsoft in terms of market cap."

The trading patterns of CEOs like Dell and Ellison are closely watched because they suggest their sentiments about their company's prospects. Dell, after all, should be the No. 1 believer -- and he knows better than any one else what's going on within the company. So last month, when he sold 1.75 million shares for an extremely cool $83.4 million -- adding to other multimillion trades this year, many wondered whether this ongoing "diversification" means he's lost at least some faith in his firm's future.

"You always have to wonder whether an insider is selling right at the top," Selkin says. "Maybe he knows something more than the general investing public. I don't want to imply any sinister motives, but you can piece two and two together."

David Coleman, editor of Argus Research's Vickers Weekly Insider Report, which tracks insider buying and selling, says Dell's increased rate of selling in the past few years has correlated to the company's slowing sales. "His selling activity did pick up considerably," Coleman says. "And any change of trading patterns is noteworthy because it might show a lack of confidence in future opportunities."

So what's Dell doing with all his dough?

It's not as if he's going on lavish spending sprees; Dell's known to live quite modestly for a man of his enormous means. Instead, he's been diverting some of his personal wealth into other ventures. He started his own investment firm, MSD Capital, specifically to manage his personal wealth, and now owns stakes in several start-up tech and dot-com ventures, including CarsDirect.com, which sells vehicles over the Web.

Some believe Dell has a knack for spotting tech trends. After all, that's how Dell Computer got started. And some of his past investments in such companies as Rambus and Cerent Corp. have clearly been right on the mark. But because people see him as such a visionary, he may have to curb his selling habits of his own company, lest risk further investor defection. Bullish talk is one thing, but on Wall Street, money has the loudest voice.

And Michael Dell's not the only one at Dell Computer who has been taking lots of profits. The PC maker's officers and directors sold more company stock last year than executives at any other U.S. company except Microsoft, according to a Vickers report. Last year, Dell insiders sold more than $2.09 billion in stock, compared with $4.26 billion for Microsoft's executives.

"This is a telling signal that there's been a price malaise in its stock," Coleman says.

The company's still on a growth curve, but it's no longer the Wall Street darling that it had been for a good part of the '90s, when investors could routinely expect monster growth each quarter. The stock has been in a prolonged slump, closing Wednesday at $40, down from its 52-week high of $59, reached last March.

"I believe its glory days are over; I hate to say it, but it's old technology," Selkin says. "Technology investors are now more interested in fiber optics, telecommunications and semiconductors."

Some believe handheld devices and broadband technology could make personal computers obsolete. And even though PC sales are up about 10 percent from last year, that pales in comparison to the 20 percent to 30 percent growth the industry saw a few years ago, says Stephen Baker, an analyst at PC Data in Reston, Va. "It's a maturing marketing," he says. "Things are getting tough."

About a month after Dell made his most recent sale, the company reported second-quarter fiscal earnings that exceeded Wall Street's expectations, but because the PC maker's revenue growth fell shy of most forecasts, the report was viewed somewhat negatively and the stock dropped.

"While we expect Dell to continue to deliver on the bottom line, we are skeptical that the company will be able to meet the 30 percent revenue growth expectations on a sustainable basis," wrote US Bancorp Piper Jaffray analyst Ashok Kumar, who recently downgraded the stock from a "strong buy" to a "buy." "We continue to believe that Dell does not have adequate earnings power in notebooks, server and non-system revenue to offset the secular weakness in consumer and commercial desktops."

Nevertheless, Dell has his defenders, who are shrugging off his recent stock sales as routine.

"I don't think he's losing confidence in the company; he may just be looking at other ventures," says Wendy Abramowitz, an analyst at Argus Research in New York. "I wouldn't see his sale of Dell shares as a sign he's getting out of the business. He'll remain there for a while."

Sure, it would be more comforting if we saw Dell actively re-tooling his company to take advantage of the next wave of devices instead of selling off stock to invest elsewhere. But, as AG Edwards & Sons analyst Jimmy Johnson, puts it: "If you got nervous every time an investor sold, you would never buy anything."

Charting the sellouts

Executive Total Shares Owned Total Shares Sold in 2000 Percentage Sold
Steve Case
8.76 million 500,000 5.7 percent
Michael Dell
343 million 8.5 million 2.5 percent
Larry Ellison
690 million 0 0 percent
Bill Gates
742 million 1.6 million .2 percent
Tim Koogle
818,000 100,000 12.2 percent
Scott McNealy
27.7 million 248,000 .9 percent
Meg Whitman
12.27 million 600,000 4.9 percent
Jerry Yang
22.7 million 0 0 percent

Figures from the SEC

By Diane Seo

Diane Seo is the senior business editor at Salon.


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