Amid all the negative outcomes of macro uncertainty and the PC market slowdown, the recent talk of the town seems to be the leveraged buyout (LBO) of the world’s third largest PC maker Dell Inc. (DELL). As per Bloomberg, Dell is soon going to transform from a publicly traded company to a private equity firm.
The LBO agreement, slated to be announced today, is likely to be signed by the founder Michael Dell, Microsoft Corp. (MSFT) and Silver Lake Partners (a private equity firm). An estimated purchase price of $23.0 billion is expected to be funded mostly by a debt raising, Michael Dell’s 15.7% stake and $700.0 million cash, $2.0 billion from Microsoft and $1.0 billion from Silver Lake. The purchase price reflects a per share price of $13.50 to $13.75. Currently, Dell is trading at $13.27.
The idea behind the privatization is to stay away from public scrutiny and expectations and better focus on business growth and profitability. But the main problem remains Dell’s dependence on the PC market. Also, Dell lacks a firm footing in the servers, storage and cloud computing space, which is a sheer negative in comparison to International Business Machines Corp. (IBM), EMC Corp. (EMC), and to some extent, Hewlett-Packard Co. (HPQ). Another competitor, Apple Inc. (AAPL) is dominating the tablet space.
Considering the situation, it is hard to predict Dell’s success story, unless the company opts for diversification.
Dell’s go-private strategy could also create other problems for the company. Without the support of public money through common shares, Dell will be required to pay high interest charges. If it is unable to generate desired results, the company could go out of business. On the positive side, founder Michael Dell (with his majority share) will be better positioned to decide operational and strategic changes that could help the company out of the difficult situation.
Improvement in the PC market is less likely in the near term due to the slower-than-expected adoption of Microsoft’s Win 8. But industry observers expect a marginal growth of 2.0% in PC shipments in 2013, which is a silver lining.
Currently, Dell has a Zacks Rank #4 (Sell).
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