What Will Happen If Dell Goes Private?

| About: Dell Inc. (DELL)

The news that Dell Inc. (NASDAQ:DELL) is in talks with private equity firms for going private served as a shot in the arm and DELL stock jumped 22%. The two PE firms involved are TPG Capital and Silver Lake Partners, who are said to be in advanced stage of discussions with Bank of America (NYSE:BAC), Barclays (NYSE:BCS), Credit Suisse (NYSE:CS) and RBC for funding the deal.

Businesses go public because it is a cost effective route for raising funds. However, I sometimes wonder whether private enterprises would ever want to go public and submit themselves to scrutiny by the public every quarter if they had a choice. But after so many years as a public company, why would DELL now want to go private? Is getting rid of public scrutiny the reason? And what would happen if the leveraged buyout (LBO) deal gets done?

Will The Deal Go Through?

There are lots of ifs and buts involved. First up, the news is from sources that do not want to reveal their names. Secondly, many people have their doubts about the deal going through.

  • The PE firms involved in the buyout may not be able to raise the funds required. The deal is one of the largest for a technology company since 2007. The enterprise value of DELL before the news came out was $18.9 billion. The buyout is also the largest for a computer company since 2003 when Hewlett Packard (NYSE:HPQ) took over Compaq Computer Corp. for $19 billion.
  • The matter of how the firms would exit their investment in the future may not get resolved.
  • A leveraged buyout will make the firm unstable considering that Dell's EPS is going down - it has come down to 39 cents per share from 51 cents per share in the last four quarters alone. Before the recent surge in stock price, Dell's shares had lost 48 percent in last five years.
  • Dell is currently in the stage of transition from a personal computer company to a services firm and trying to take on the role of IBM for SMEs. A leveraged buyout at this stage might make the metamorphosis more difficult.

There is a flip side to all this and my personal opinion is that the deal will go through easily.

The economy is improving and there are a lot of funds out there ready to be invested. Raising funds in an environment of zero interest rate policy should not be difficult. There have been a lot of buyouts exceeding $15 billion in 2011. Even companies like Chesapeake Energy (NYSE:CHK) could find financing reasonably easy despite huge negative cash flows.

At the age of 19, in 1984, Dell's CEO, Michael Dell, started the company from a University of Texas room assembling PCs from off-the-shelf parts and was able to take it to the top spot, which it lost to HPQ only in 2006. It is only now that the trend is changing from PCs to handheld mobile devices and the company has had to struggle with competitors like Apple (NASDAQ:AAPL) and Samsung (OTC:SSNLF).

The point that I am trying to make is that the net worth of Michael Dell is $13.7 billion. Not only can he use a part of his wealth to help in financing the deal, the fact that he owns 15.7% of Dell will also make equity financing of the deal a lot easier.

True, Dell's earnings have been going down, but it has been so only in 2012 when the annual EPS fell from $2.12 to $1.70. Moreover, considering that the demand for PCs has gone down dramatically and Dell has been using acquisitions to sell more computers, the performance has not been so bad. However, earnings seem to have bottomed out and analysts tracking the company expect them to grow at an annual rate of 2.8% in the next five years.

What Happens If the Deal Gets Through?

Dell is a victim of negative market sentiment. It is still being perceived as a computer company despite the fact that it offers products, services and solutions. The market for PCs has declined and the market has taken its shrinking PC division and its reluctance to enter the mobile and cloud computing as a big negative.

By going private, Dell will get rid of quarterly public scrutiny, the bane of every CEO. Moreover, once that happens, Michael Dell is liable to gain the flexibility required for regaining lost ground and market share. On the product front, he will be in a better position to go after the likes of Apple and Samsung and on the services and solutions front, vie with Cisco Systems (NASDAQ:CSCO) Oracle Corp. (NASDAQ:ORCL) and International Business Machines.

According to the latest reports, the deal is likely to be struck between $13 and $14 a share and the buzz is that the deal may be announced as early as this week. My considered view is that the stock is attractive at the rate it is currently trading. The private equity firms are trying to take advantage of the low stock price of Dell (the 52-week high of Dell is $18.36, achieved sometime in February 2012) and so should investors with a medium to long term horizon.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.