Recently, Dell (DELL) announced a deal to take itself private in a transaction valued at $24.4 billion and lead by a group of investors including Silver Lake Partners and founder Michael Dell. However, this proposal was not well received by everyone, as some shareholders believe that the company is undervalued at the proposed value, which valued the stock at $13.65 per share. Prior to the buyout rumors, the stock was at $10.88 per share, meaning the buyout was at a nearly 30% premium to the market value. Since this deal was announced, investor Carl Icahn has proposed his own deal, yet within the last few days, issues have evolved with this deal, and the Silver Lake deal now appears to be back in the lead. With a deal yet to be approved and various offers now floating around, what does a potential deal mean for the future of Dell?
Dell's business has been struggling in the last few years, with its revenue up less than 10% from 2010, and down about 10% from last year, while its operating income has seen a similar trajectory. Yet even with that lackluster performance, Dell does have a healthy balance sheet with over $12 billion in cash and only $5 billion in long-term debt. This large cash balance is one of the reasons there are so many discussions about taking the company private, as the company could shoulder a significant potential debt load with current cash, as well as cash operations, which has been generating over $3 billion per year the last 4 years. With this kind of performance and balance sheet when the company is clearly struggling, there is hope that results could improve with new ownership.
The proposed buyout to private ownership has not been easy for Dell, as the company has had a hard time convincing shareholders to vote in favor of the deal. And with Carl Icahn placing a competing bid, the battle is now even tougher, as Icahn's deal appears to offer more cash and benefits to shareholders. However, Icahn's deal is now believed to be short the necessary financing, lessening the offer's potential impact.
What Does A Deal Mean?
So what does a potential deal mean for the company? Management has clearly been focused in recent years on trying to shift from manufacturing to more services in an effort to improve results. Yet in Michael Dell's term sheet, he mentions a variety of things that he plans on doing to improve results and remain competitive in today's environment, including investing more money in emerging markets, focusing on customer service, and continue their emphasize services. You can see from his vision that he plans to focus more on people/employees and growing the company in new economies than on expensive and cash-heavy items such as manufacturing, as the large potential debt load after the deal would make it harder to do so. Because of this, Michael Dell is clearly happy with the path of the company over the last few years (focusing more on services), as his vision remains in line with these recent changes - in the last few years, Dell has increased its services to nearly 30% of revenues. However, the biggest problem Dell is faced with is being poorly positioned to continue to grow in the PC market, which still makes up over 50% of their sales.
The Deal and The Competition
In 2011, Dell was #3 in PC shipments behind HP (NYSE:HPQ) and Lenovo (OTCPK:LNVGY) (the old IBM PC business), yet was the slowest grower of the top 5 companies. More concerning is that Apple (NASDAQ:AAPL) and Samsung (OTC:SSNLF) are numbers 7 and 8 in the rankings, but growing at over 25% annually, meaning it won't be long before they catch and surpass Dell. When we fast forward to the 4th quarter of 2012, Dell was still in 3rd place, but had dropped 2% of its market share in the previous 12 months, while HP and Lenovo both gained market share. Considering the direction of the industry (towards mobile computing) and the fact that Dell does not have a tablet in its current lineup, the situation is troubling at least.
What To Expect
Overall, it's beginning to look more and more like Dell will be taken private. Going private will have Dell focus very hard on generating cash, even at the expense of making money, and growing new and smaller parts of the business. With all of these changes, it is hard to see where the company will go in the next few years, and with its recent struggles, it is difficult as well to see the company making a dramatic recovery. For those interested in the industry, it may be better to look at the competitors, many of whom have solid foundations, strong outlooks, and better products.
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Business relationship disclosure: This article was written by an analyst at Catalyst Investments.