Dell Inc. (DELL), Microsoft Corporation (MSFT): The New Paradigm in Computer Hardware

As Michael Dell and the Dell Board of Director’s evaluate their business and reflect on the future (and for that matter, Meg Whitman and the HP Board as well), its pretty clear they are watching what the big kids on the block are doing: International Business Machines Corp. (NYSE:IBM) and Oracle Corporation (NASDAQ:ORCL).

Keeping up with the Jones’ – transforming into a modern technology brand

Originally a hardware company serving business, academia, and government, IBM has successfully transformed itself into a world class provider of complete enterprise solutions: hardware, software, advisory, consulting. And the results speak for themselves.

IBM is a behemoth, with a market cap in excess of $200 billion. Gross profit margins are 48% (double that of Dell), operating margins are 21.2% (nearly 4 times better than Dell), and return on equity is an impressive 84.7% (3.5 times better than Dell). The market recognizes IBM’s performance, and places a high premium on the stock, which is currently trading around 14.25 times trailing twelve months P/E and 12.02 times price to book.

With IBM, at the pinnacle of the industry stands Oracle. With over 73% of total revenue derived from software sales, Oracle’s gross margins are a staggering 78.6%. Operating margins are impressive at 38.5%, and net profit margins are 28.4% (compared to 4.2% for Dell). Just like IBM, Oracle trades at a premium of over 16 times price to earnings.

The differentiator here is that IBM and Oracle are no longer hardware companies, they are technology companies in a much broader sense. They provide much more than servers, desktops, or laptops — they provide innovative software, they provide consulting, and, most fundamentally, they provide technology solutions for the entire enterprise.

The bottom line for Dell is that going private will close the curtain on Wall Street while the company attempts to fundamentally change itself. The upside is truly huge if successful, and Michael Dell certainly stands to gain quite a bit financially. Nothing, of course, is a sure thing, and there is still years of work to be done before the curtain can be lifted once again.

Oh, and there’s the other big challenge — Dell’s shareholders have to approve the deal.

The article The New Paradigm in Computer Hardware originally appeared on Fool.com.

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