Friday, September 23, 2005

Where are those receivables, Mr. Dell?

Vitally at Minyanville raised a very interesting question saying that it may be ok to have some receivable growth. Specifically, he questioned that DELL may not carry as much credit risks as it may appear on the Balance Sheet. So I took a peek a their 10Q.

Guess What I've found? Dell has a subsidiary called DFS (Dell Financial Services). It is a joint venture with CIT group but is 70% owned and consolidated. When a sub is consolidated, you'll include all income, asset and liabilities at 70% of whatever DFS owns onto DELL's profit and loss statement. That's strike one.

Now, for an even stranger note. DFS has been selling loans/receivables of $191mm or about 80% of total generated from DFS to, get this, UNCONSOLIDATED SPECIAL PURPOSE ENTITIES WHOLLY OWNED BY DELL. Why would someone do this? Even though receivables are generally good because they are assets but if run your receivables too big and too fast, you essentially become a bank. GE and BA are fast becoming banks even they are still classified as industrials. If you are a bank, you will run into credit risks eventually and that'll will wipe out all your previous and future earnings that you anticipate. DELL is fully aware of this risks and thus actively managing it, although the underhanded manner that it is being handled strike me the wrong chord.

Haven't we watch this movie before...wasn't it called "Enron & its special purpose entities?" IMDB rating 9.8.

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