Dell – What now?

This deal is all about making money.

• Dell has announced that it is going private in a $24.4bn leveraged buyout where Michael Dell and Silver Lake will acquire the company.
• There are two possible reasons to go private.
  • First. Dell needs peace and quiet away from the glaring eye and wild swings of Wall Street to affect the turnaround that it has so far failed to do as a public company.
  •  I have discussed this possibility here.
  • Second. The company is cheap and represents an attractive return for an investor prepared to take the risk that revenues never grow again.
• As far as I see it the company has two options to return to growth.
  • One. It can reinvest in R&D (margins would fall in the short-term) in order to properly address the changes in the PC market.
  • Form factor, look and feel are important again but without any R&D there is no chance to really emerge ahead of the pack.
  • Most PC makers outsourced R&D to their ODM partners as Intel and Microsoft drained the PC industry of profitability leaving them unable to differentiate in the new environment that Windows 8 brings.
  • Investing in R&D could make Dell products exciting again and stop the inevitable market share loss that I see happening as Asustek and Samsung come to market with innovative and differentiated products.
  • Two. Break the company up, sell off the PC business and focus on the software and services.
  • This would restore growth but it would cause the revenues to more than halve before growing off a much lower revenue base.
  • Dell has around $10bn in debt which is likely to grow meaningfully to acquire the equity.
  • The PC market is in very poor shape but I suspect that Dell’s PC business is big enough such that it could be patched-up and sold off generating enough proceeds to pay down the debt.
  • This would leave Michael Dell and Silver Lake with the equity of the software and services piece.
  • Get this growing steadily and follow up with an IPO and one has the makings of a very tidy profit.
• Option one could have been effected as a public company and therefore would seem to be a poor reason to go private.
• Hence, I believe that Silver Lake and Michael Dell have seen the opportunity for a handsome profit and decided to take advantage of the fact that even at $13.65, the shares are very cheap.