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    Dell Going Private Would Carry Rewards, Risks: Analysts

    Written by

    Jeff Burt
    Published January 16, 2013
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      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.

      Dell Going Private Would Carry Rewards, Risks: Analysts

      Given the significant transformation Dell is undergoing, going private makes sense, according to Rob Enderle, principal analyst with the Enderle Group.

      “It allows the company to function with the agility of a startup and most of the resources of a large public company,” Enderle said in an email to eWEEK. “In effect, if you are contemplating making some major structural changes to the company, this is like, in a car race, pulling the car off the track to do the heavy modifications, rather than trying to do those changes during a pit stop or while the car was actually racing.”

      Dell, like companies such as Advanced Micro Devices, HP and Intel, has been hit hard by the slide in sales of PCs in recent quarters as consumers turn their attention—and money—to mobile computing devices such as tablets and smartphones. Gartner said Jan. 14 that PC shipments fell 4.9 percent in the fourth quarter of 2012, with Mikako Kitagawa, a principal analyst, saying that “tablets have dramatically changed the device landscape for PCs, not so much by ‘cannibalizing’ PC sales, but by causing PC users to shift consumption to tablets rather than replacing older PCs.”

      During the quarter, Dell, the world’s third-largest PC vendor, saw shipments drop 20.9 percent over the same period in 2011, and Gartner is estimating that for 2012, Dell will see a 12.3 percent drop. About half of Dell’s revenues are related to its PC business, and executives are looking to reduce the company’s reliance on this area as it shifts to a more enterprise-centric strategy.

      Dell, which has a market capitalization north of $19 billion, generated more than $42 billion in revenue and $1.8 billion in income during the first three quarters last year.

      Michael Dell, who owns about 16 percent of the company, reportedly told analysts in 2010 that he had considered taking the company private, though nothing came of it. However, if he is serious this time, there are “a lot of pluses,” Roger Kay, principal analyst with Endpoint Technologies Associates, told eWEEK.

      “Michael Dell has been looking to run the company with a long view, and Wall Street is very impatient with that,” Kay said. “In private equity, they’ll wait 10 to 15 years for payback.”

      However, while Dell going private would bring a lot of advantages for the company, there are some risks—though Kay said they seem “limited.” The group that buys the company and takes it private could become unfriendly afterward, but that would be unlikely if Michael Dell is part of that group. Large investors also can gain a lot of power—more than a “typical board member”—which could impact the debt, according to Enderle.

      There’s also finding investors that can come up with the money for a leveraged buyout of a company the size of Dell, said Pund-IT’s King. A buyout of Dell would be the largest since 2007, according to some reports. Still, Dell’s market capitalization figure would make it “a rich deal, but not impossible,” he said.

      Jeff Burt
      Jeff Burt
      Jeffrey Burt has been with eWEEK since 2000, covering an array of areas that includes servers, networking, PCs, processors, converged infrastructure, unified communications and the Internet of things.

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