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Tickers in this Article: RSH, CC, BBY, SHLD, DELL, HPQ, APPL
Rumors are swirling that Dell Computer (Nasdaq: DELL) could make a bid for Radio Shack (NYSE: RSH) - the well-known retailer of electronic toys, computers, telephones and other gadgets.

So, why would Dell want to buy Radio Shack?

Dell's had a host of problems over the past year (ranging from customer-service issues, competition issues, and its waning share price), and some argue that the company needs to do something to improve its distribution and get a leg up on Apple (Nasdaq: AAPL) and Hewlett Packard (NYSE: HPQ).

Why Radio Shack, and Why Now?
While Dell could build out a more-traditional, bricks-and-mortar format on its own, some argue that Radio Shack, in particular, has a lot to offer and that buying the company makes an awful lot more sense than starting from scratch.

For those unaware, Radio Shack sports more than 6,000 company- and dealer-operated stores in some enviable locations. In addition, the Radio Shack name still has clout in electronics circles.

After all, the company's been around since 1921, and it continues to maintain a reasonable reputation among "techies". I would argue that the company done a terrific job staying relevant and catering to hard-core electronics aficionados in the face of serious competition from big-box retailers such as Best Buy (NYSE: BBY) and Circuit City (NYSE: CC), particularly over the last few years.

Dell could use these assets to its advantage and tap into demographics that its only glossed over in the past.

From a product perspective, it might also allow Dell to do what Apple has been so successful at - tapping the mainstream consumer-electronics market. Further, it might also help to lure customers that like Dell's desktops and laptops but who are otherwise reluctant to spend over $1,000 on an internet-based purchase.

The Counter Argument
Retail is a tough business. When Dell dipped its toe into the water in the 1990s, it nearly got bitten off by other, lower-priced providers. Also, many big-named, deep-pocketed players including Gateway proved that PC-centred storefronts are a tough sell - even in a strong economy.

Yet another reason why Dell might be reluctant to make a bid for Radio Shack is that some consider Radio Shack a bit too pricey at almost one-times sales and more than 20-times the current year's consensus earnings estimate of $1.48 per share.

If I were at the helm at Dell, I'd be watching my cash carefully given the company's recent woes, and, while I'd want to expand distribution, I'd want to do so at the lowest possible price.

Radio Shack As A Standalone
As mentioned above, the Radio Shack's stock isn't cheap. However, over the next year, thanks to the closure of some underperforming stores, and management's efforts to focus on higher-margin merchandise, it has the potential to report some respectable earnings growth.

It's year got off to a good start. Radio Shack is coming off a pretty solid first quarter, reporting earnings of 31 cents per share - more than double the 13 cents per share to 14 cents per share that Wall Street analyst's had been expecting.

Wall Street predicts this year's earnings to be $1.48 per share, and the average consensus estimate for 2008 is $1.64 per share - implying an expected growth rate of about 11%. That's not too shabby.

A Good Day
It also has solid management in its chief executive Julian Day. In case you haven't heard of him, Day made a name for himself helping lead Kmart out of bankruptcy and as the CFO at Sears (Nasdaq: SHLD), where he helped the company hold its own against some pretty formidable competition.

Day is doing a good job instituting cost cuts and making the company more attractive to the investment community. He's also doing the right thing by eliminating or reducing unpopular merchandise such as metal detectors and offering items that tend to draw more foot traffic such as satellite radios, digital cameras and portable DVD players.

The Bottom Line
I wouldn't buy the shares in anticipation of a buyout offer from Dell. That'd be more like icing on the cake if it happened. However, as a standalone, I think that Radio Shack's stock warrants a second look given Day's efforts to boost the company's top line and bottom line over the past year.

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