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Dell buyout deal could rescue company

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By Bloomberg News
Tuesday, Jan. 15, 2013, 9:00 p.m.

Dell Inc.'s buyout talks may finally give founder Michael Dell the chance to jump-start growth after years of half-measures have fallen short.

Dell, the third-largest personal computer maker, is discussing a leveraged buyout with private equity firms TPG Capital and Silver Lake, a person with knowledge of the matter said Monday. Before the buyout talks were reported, its shares had lost 48 percent in the past five years, compared with a 3.6 percent gain by the Standard & Poor's 500 Index.

A deal would free Dell from the fluctuations of a stock market that has lost patience with the company's shrinking PC division and its inability to adapt to an industry-wide shift to mobile and cloud computing. By going private, Chief Executive Officer Michael Dell might gain flexibility to vie with Apple Inc. and Samsung Electronics Co. for consumers while combating Oracle Corp., Cisco Systems Inc. and International Business Machines Corp. in the market for data-center gear.

“They could generate a tremendous amount of cash for many years to come, or they could be more dramatic and invest heavily in a mobile strategy — and not be scrutinized by public investors every quarter while they did it,” said Rich Kugele, an analyst at Needham & Co.

A deal could be announced as soon as this week, said one person, who asked not to be identified because the talks are private. Discussions also could collapse if firms fail to arrange financing or find a way to exit the investment, the people said. A buyout would require pulling together more than $20 billion in equity and debt.

Dell shares lost 21 cents, closing at $12.96 on Tuesday, after gaining 13 percent on Monday.

Dell, 47, has spent more than $12.7 billion in the past four years to compensate for plunging PC demand. He's aiming to woo customers bulking up in computing over the Internet with sophisticated storage gear, software and consulting services. While shifting away from PCs and other low-margin electronics can boost profit, it also cuts revenue. Dell could make that trade-off at a faster pace if he weren't beholden to public shareholders.

each quarter, said Abhey Lamba, an analyst at Mizuho Securities USA Inc.

“He wants to de-emphasize about two-thirds of his business, and that's a hard strategy to push,” Lamba said. “That's a hard one to play when you're in the public market.”

CEO Dell, who founded the company with $1,000 in 1984 in his University of Texas dorm room, was viewed as an industry wunderkind. The company had an initial public offering in 1988.

His original insight — that it's possible to sell complex high-end machines more efficiently and conveniently than was thought possible — helped fuel a 20-year boom.

By cutting out middlemen and honing manufacturing so companies and consumers got exactly the PC configuration they wanted, Dell grabbed share and piled up profit even with lower operating margins than rivals like IBM and Compaq Computer Corp.

Dell ceded the CEO role to Chief Operating Officer Kevin Rollins in 2004 only to come back to the helm in 2007 after the company lost its top PC spot to Hewlett-Packard Co. and earnings fell short of estimates. The board sought his return amid an accounting scandal that later resulted in a $100 million settlement with the Securities and Exchange Commission.

Since his return, Dell has talked publicly about “pruning” his PC business while using the cash it generates to snap up companies in computer networking, storage and enterprise software.

Dell has said he's prepared to make drastic moves to remake the company's future. Shortly after coming back, the CEO brought in leading industrial designers for a day to get ideas for how to resurrect the company's fading brand.

“I was genuinely impressed with his candor; he really wanted to resurrect the brand,” said Gadi Amit, founder of NewDealDesign LLC, who was there that day.

Dell hired an internal design team, though the effort fell flat, Amit said.

“Sporadically, they've done some nice products, but it wasn't enough,” he said.

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