Dell's saga: When facts don't matter

By Bill Fleckenstein

Feb. 1: The beginning of the month -- and a day that offered as fine a testimony to insanity as I have seen in my investing career.

The looniness began the night before, when Dell Inc. (DELL, news, msgs) announced the resignation of Kevin Rollins, its CEO since 2004. That follows the recent departure of Dell's chief financial officer, as well as other high-level managers. Just two days earlier, Rollins, along with Microsoft CEO Steve Ballmer and other PC-oriented executives, had appeared in New York to tout Microsoft's new Windows Vista operating system. (Microsoft is the publisher of MSN Money.)

Furthermore, the computer maker announced in the same news release that it wouldn't make the consensus estimates for this quarter, which was the case in three out of the previous four quarters. The quarter in which Dell actually won at beat the number -- last quarter -- was one in which it didn't produce any financials. Dell hasn't been able to produce financial information for a couple of quarters, thanks to the continuing Securities and Exchange Commission investigation of possible "misstatements in prior financial reports, including issues related to accruals, reserves and other balance-sheet items that may affect the company's previously reported financial results." That's quoting from Dell's Sept. 11, 2006, news release.

Readers may recall that in the past 18 months, Dell's strategy was to gain market share, then boost profitability, then gain market share, then boost profitability again. Along the way, Dell decided not just to be the "direct model" but also to open retail outlets. There is nothing that the company hasn't tried. All of which demonstrates that it's obviously in disarray.

Thus, I assumed that when the stock reopened Feb. 1 (after being halted the night before), it would be hammered. But I was wrong, as it was immediately up 8% -- having never even down-ticked, although by day's end some sanity did prevail, as the stock closed flattish.

Naturally, folks chose to ignore the recent data -- showing that Windows Vista has not only not stimulated personal-computer sales but has frozen them -- as they rallied behind the battle cry that founder Michael Dell is back now and that he will return the company to its former glory. The rather large fly in that ointment is that Michael Dell never left the company. He and Rollins had essentially been co-CEOs. All the problems and miscues that have occurred at Dell have been a function of Michael Dell's mistakes, not someone else's.

Dynamic duo in deep doo-doo?

Meanwhile, another problem looms for the company. Witness a recent Wall Street Journal story: "Dell's Woes Mount as Investors File Improper-Accounting Suit." According to the paper, "the complaint alleges that Dell received 'e-cap payments' (rebates) from Intel (INTC, news, msgs) for not doing business with Advanced Micro Devices (AMD, news, msgs). The approximately $1 billion a year that Dell received in such payments was spread out unevenly over the four quarters, money that would be applied to reduce the portion of Dell's expenses known as cost of goods sold, the complaint states."

This is a powerful accusation that, based on the specificity, I think could only have come from a disgruntled employee or some similar source. Essentially, the accusation says Intel provided a cookie jar for Dell to manage its operating-profit and gross-margin numbers. I have long believed that Dell -- and thousands of other companies -- had to be doing something "unorthodox" to magically always hit the number and not experience the margin pressure that I think they should have.

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