The past few years for personal computer manufacturer Dell (Nasdaq:DELL) have been rough, to say the least. As tablets, smartphones and other mobile devices have eaten away at PC sales, shares of the firm have struggled. Over the last five years, Dell has fallen by 43%, sinking into the single digits by the end of 2012.
Salvation, however, could be coming to suffering shareholders. After nearly 25 years as a public company, rumors are circulating that the former tech titan may be considering taking itself private. The buyout would certainly be welcome by both private investors and founder Michael Dell, as the firm has had a tough time finding its place in the post-dotcom tech sector.
While the news is just speculation right now, it could be the biggest tech story of the entire year.
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Dude! You're Getting an LBO!
According to Bloomberg, Dell is in talks with TPG Capital and Silver Lake Partners to finance a leveraged buyout (LBO) of the firm. The decision to go private comes two years after Dell's chief financial officer spoke to CNN, saying that it would consider going private with Michael Dell remaining as the largest shareholder. The time for the buyout may have finally come.
The firm remains stuck in an intense battle on two fronts. Devices such as Apple's (Nasdaq:AAPL) iPad and tablets powered by Google's (Nasdaq:GOOG) Android software have eaten the personal computer alive. Sales for PCs continue to dwindle as consumers shift spending towards these smaller and "sexier" products. That's hit Dell right where it hurts. The personal computer business remains its bread and butter, bringing in 70% of revenues.
On the flip side, the data-center market continues to be a fierce battle as well. Firms such as Oracle (Nasdaq:ORCL) and IBM (NYSE:IBM) are able to offer corporate clients various enterprise software suites along with their hardware purchases. This makes them one-stop shops versus buying a server piecemeal.
Failures with the firm's other consumer products endeavors such as MP3 players, handhelds and televisions have only compounded issues at Dell.
These stumbles have caused investors to lose patience with the tech leader, making a buyout all the more likely for the firm. Michael Dell and Company - shielded from the public eye - could take time to develop a strategy to compete in these markets. Already, it seems to be making moves to provide more services along with its PC/server options. By going underground, Dell could really turn the ship around and emerge as a force once again.
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Odds are Looking Good
There are some issues with the deal getting done - the biggest of which would be the size. Analysts peg the deal to be worth between $20 billion to $25 billion worth equity and debt. That's a huge chunk of change. Secondly, the $14.2 billion in cash on Dell's balance sheet is mostly located overseas, creating a huge tax liability for anyone wanting to tap it.
While legendary investor Wilbur Ross thinks the buyout only has a 50% chance of succeeding, the broad market thinks it's a done deal - shares of the firm surged more than 13% when the news broke. More evidence is certainly pointing in the direction of a LBO.
According to Reuters, Silver Lake has already tapped Credit Suisse (NYSE:CS), Barclays (NYSE:BCS) and other prominent investment banks to finance a potential deal. Additionally, JPMorgan Chase (NYSE:JPM) has been said to be advising Dell on a potential buyout of the $19-billion company. Analysts have begun raising their price targets for the PC maker to reflect the buyout.
With each passing hour, the proposed deal gets closer to reality.
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The Bottom Line
While the story is far from over, the news of a potential LBO of Dell is certainly welcome news for the firm's long-suffering shareholders. If it goes through, the deal will be one of the biggest in years and could signal the return of a buyout binge last seen before the Great Recession.
At the time of writing, Aaron Levitt did not own any shares in any company mentioned in this article.