Dell Going Private Would Carry Rewards, Risks: Analysts

Dell officials are considering taking the company private in hopes of making the job around its transformation easier, according to reports.

Dell executives reportedly are considering taking the embattled vendor private as they continue to push efforts to transform the company and reduce its reliance on the contracting PC business.

According to a report in The Wall Street Journal and Bloomberg, Dell officials during the past two to three months have talked with TPG Capital and Silver Lake about the idea of going private, and a number of large banks have been contacted about issues around financing for such a move, the reports said, citing unnamed sources.

Taking the company private would enable Dell officials to accelerate their efforts to remake the company outside of the glare of Wall Street analysts and investors. Dell spokespeople had declined to comment on the reports.

The reaction from investors has been good, with Dell stocks rising sharply—at one point by more than 13 percent—after the reports. However, financial analyst reaction was mixed, with many saying such a move could help Dell in its turnaround efforts, but that the size of the deal could hold it back.

Dell has a number of factors in its favor, such as high free cash flow and cheaper financing options, Abhey Lamba, an analyst with Mizuho Securities, wrote in a research note.

"Additionally, management could work on its transition strategy without the pressure of meeting quarterly targets," Lamba wrote. "Investors could cut the less profitable portions of Dell's business (consumer and low-end PCs, and third-party software), reduce costs and make the organization more focused and leaner before going public again. ... However the deal size and strategic reasons could make the transition even harder. Dell is in the middle of expanding its focus on more profitable parts of the business, which could need significant investments as well as enhanced capability to make more acquisitions. Unless the private-equity investors are willing to continue injecting capital to support strategic decisions, the company's transition to be more enterprise-focused could become even harder."

That focus on the enterprise has been a key driver for Michael Dell since he returned to the company as CEO in 2007, three years after retiring from the job. Since then, the company has been aggressive in more than a dozen acquisitions of such companies as Perot Systems for services, Compellent and EqualLogic for storage, Force10 Networks for data center networking, and SonicWall for security.

The moves are putting Dell into greater competition with other enterprise IT solutions providers, such as Cisco Systems, Hewlett-Packard and IBM.

The company has done a good job in its transformation efforts, Charles King, principal analyst with Pund-IT Research, told eWEEK. Dell is becoming a much more enterprise- and software-centric company—and one that continuously turns a profit—and yet the stock remains relatively stagnant, thanks in part to the spotlight Wall Street shines on all public companies, King said. Going private would remove that problem.

"You don't have to worry about the market scaring away investors," he said. "That's been a killer to a number of technology companies for quite a while. ... By taking yourself off the tablet of financial industry analysts and headlines, you get out of the hype cycle and just continue doing what you're doing and making money for shareholders."

He pointed to HP (with its high revenues and income) and EMC (strengths in such areas as storage, cloud, virtualization and big data) as examples of companies that have been hurt financially by how they're perceived by Wall Street and saddled with static stock prices despite strong assets. Dell has seen its stock price fall by almost 40 percent during the past few years.