Dell – What now?

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This deal is all about making money.

  • Dell has announced that it is going private in a $24.4bn leveraged buyout where Michael Dell and Silver Lake will acquire the company.
  • There are two possible reasons to go private.
    • First. Dell needs peace and quiet away from the glaring eye and wild swings of Wall Street to affect the turnaround that it has so far failed to do as a public company.
    •  I have discussed this possibility here.
    • Second. The company is cheap and represents an attractive return for an investor prepared to take the risk that revenues never grow again.
  • As far as I see it the company has two options to return to growth.
    • One. It can reinvest in R&D (margins would fall in the short-term) in order to properly address the changes in the PC market.
    • Form factor, look and feel are important again but without any R&D there is no chance to really emerge ahead of the pack.
    • Most PC makers outsourced R&D to their ODM partners as Intel and Microsoft drained the PC industry of profitability leaving them unable to differentiate in the new environment that Windows 8 brings.
    • Investing in R&D could make Dell products exciting again and stop the inevitable market share loss that I see happening as Asustek and Samsung come to market with innovative and differentiated products.
    • Two. Break the company up, sell off the PC business and focus on the software and services.
    • This would restore growth but it would cause the revenues to more than halve before growing off a much lower revenue base.
    • Dell has around $10bn in debt which is likely to grow meaningfully to acquire the equity.
    • The PC market is in very poor shape but I suspect that Dell’s PC business is big enough such that it could be patched-up and sold off generating enough proceeds to pay down the debt.
    • This would leave Michael Dell and Silver Lake with the equity of the software and services piece.
    • Get this growing steadily and follow up with an IPO and one has the makings of a very tidy profit.
  • Option one could have been effected as a public company and therefore would seem to be a poor reason to go private.
  • Hence, I believe that Silver Lake and Michael Dell have seen the opportunity for a handsome profit and decided to take advantage of the fact that even at $13.65, the shares are very cheap.

3 thoughts on “Dell – What now?

  1. You assessment is quite persuasive. Yet, with HP again on the lookout for a buyer for its PC division (http://qz.com/50045) , I wonder if Dell might have a hard time selling its hardware arm at a high enough price to pay off its debts. Reuters says the new owners will take on $16 billion of additional debt (http://www.reuters.com/article/2013/02/07/dell-buyout-details-idUSL1N0B6JIE20130207) on top of what the debt Dell already has. Adding them up might be a bit simplistic, but $26 billion is about 40% more than what the market thought the whole company was worth just a few months ago.

    • I think might very well have a hard time selling it. Dont forget though that it is profitable and does generate cash so it has a value. This value I suspect is higher than the market is currently giving it credit for. Furthemore the software assets are currently being polluted by the PCs meaning that more value could be released once the PCs have been put to bed and some / all of teh debt has been paid down.

  2. Pingback: Dell – Greed and fear | Radio Free Mobile

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