January 14, 2013

Will the Once Mighty Dell Truly Take Itself Private?


Just this morning, we provided some insights on the current shape of the PC market. There wasn't much good to say about it other than it is time to fully accept the reality that the PC market has now entered a permanent state of decline. Aside from Lenovo, which continues to increase market share for itself, the rest of the field is clearly headed toward ever decreasing market share, and for the most part the vendor that has lost the most ground - along with strong indications that it will continue to do so is Dell.

In 2012, Dell saw its share of the market decline from 11.7 percent in 2011 to 10.7 percent in 2012, and the company saw a decline in sales for 2012 of 12.3 percent. Worse, for Q4, 2012 Dell's sales dropped 26 percent in Europe and 16.5 percent in the United States. In the meantime, Dell continues to struggle as it tries almost fruitlessly to gain any footing in the various mobile markets it needs to be successful in, and it has almost no traction in the tablet space. Along with the decline in market share, Dell's stock has lost roughly 33 percent of its value over the last year (from its peak of $18.36 over the last 52 weeks).


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Faced with a rapidly deteriorating market for its primary business and unable to build out a robust mobile business, Dell's CEO Michael Dell has taken to hinting over the last few months that the company may look to turn inward and go private. It's always a shock when a public company looks to go private; typically these companies are distressed entities. But Dell is currently ranked number 44 on the Fortune 500 list for 2012 (down from 41 in 2011), and though its PC market is shrinking it is hardly distressed.

And yet rumors are in full bloom today that Dell is in serious talks with several private-equity firms over a potential buyout deal. Bloomberg TV broke the original news earlier in the day, and the Wall Street Journal has followed up as well. Dell has declined to comment and claims the noise is nothing more than speculation (which is usually code for, yes, we are in play or at least considering it).

Needless to say, the stock is jumping all over the place on the news, and trading on the stock, which is on the NASDAQ exchange, had to be halted for a while, though it has now resumed. As we write at 4 pm the stock has settled down to $12.29, up $1.41, or 12.9 percent since the market opened this morning. Michael Dell himself still owns 273,393,925 shares - 15.7 percent of the total outstanding shares). His stake is valued at roughly $3.36 billion as we write. That Dell himself still owns that large 15.7 percent of the company might make it easier for equity firms to put together equity financing for the deal.

It's true that Bloomberg reported the talks, but it's clearly hedging its bets as it also said that discussions are preliminary and could fall apart. Well, there is proof solid of one's convictions!

Dell's market cap as of today sits at $21.31 billion, along with an enterprise value of $16.67 billion. Quite honestly, in today's market, $21 billion (along with whatever premium Dell would require for the board to sign off on it) is not out of the question in terms of arranging the necessary financing to pull it off. But such a deal would be hugely complex - perhaps too complex to really pull off. It would certainly represent an awesome opportunity for several investment banks to earn whale-sized fees.

According to the Wall Street Journal, Goldman Sachs recently upgraded Dell to buy from sell, and noted that an LBO transaction or levered recap provides a floor for shares. The direct Goldman Sachs quote is as follows:

"Dell has the option to take advantage of its healthy balance sheet for strategic purposes, something that other net debt hardware names do not have in their favor. With Dell shares trading at such a discounted valuation, the company’s sizeable cash position, and Michael Dell’s previous public comments about taking the company private, we built a model to help gauge the potential viability and attractiveness of a Dell LBO. Our results indicate that a Dell LBO transaction would be difficult given the tax impact on foreign cash and the large deal size, but potential involvement by CEO and founder Michael Dell makes it difficult to completely dismiss an LBO transaction entirely. Either way, we believe that LBO considerations will help provide a floor for shares."

It certainly sounds to us like Goldman Sachs wants to get in on the whale sized fees. Of the very few banks with the ability to take Dell private, Goldman would certainly be in direct contention for such a task.

We would be very much inclined to dismiss all of this as completely idle chatter, but Dell's absolute inability to execute on the mobile side of things - it has flopped consistently with its mobile products and strategies to date, along with the precipitous declines in its PC sales leaves the door open to such a strategy.

We suggest keeping a sharp eye on the stock and on Dell's next earnings call.




Edited by Brooke Neuman



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