Dell shares soar on speculation of private equity buyout



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16 January 2013 | 0

The media is agog with the news that Dell, once the world’s biggest PC maker, is about to go private as the company struggles to find a new course for itself following the end of the PC boom.

The Financial Review (AFR) reported that Dell is in talks with private equity firms on a potential buyout. This information came from a source familiar with the matter via Reuters, which confirmed a Bloomberg report that had emerged earlier.

As a result of this news, Dell’s shares soared 13% to almost an eight-month high. The company has a market capitalisation of about $19 billion.

Both Bloomberg and The Wall Street Journal have reported that the world’s third largest PC maker is in talks with at least two buyout firms about going private-Silver Lake Partners and TPG.




However, the discussions are said to be preliminary. The WSJ Online report said that "talks between Dell and private-equity firms have been going on for the last two to three months". They attributed the information to people with knowledge of the conversations.

The report also said if any deal is struck, the details would possibly emerge in the next six months. JP Morgan is said to be involved in the deal process and several banks are ready to provide financing for the deal. Bloomberg mentioned that a deal could be announced as soon as this week, one person said.

Dell, meanwhile, has kept mum on all this speculation and has declined to comment on the matter.

According to experts AFR spoke to, the idea of taking Dell Computers private makes sense as the company has lost 40% of its value since last year’s peak. Also, it is trying to reinvent itself as a seller of higher-margin services to corporations.

Dell’s decline has been steady but the main reason, experts point out, has been the shrinking PC segment in the market. Currently, PCs still account for half of Dell’s revenue. PC shipments in the fourth quarter of 2012 fell 4.9% from a year earlier, according to research firm Gartner. Dell’s shipments fell 20.9%, Gartner said. However, Dell’s net cash balance of $5.15 billion can play an attractive part in the buyout deal if it goes through.

"That drop off is hitting Dell’s top and bottom line," said a report in the WSJ. "In the quarter ended Nov. 2, Dell’s revenue from PCs declined 19% compared with a year ago. Overall, Dell’s profit declined 47 percent from a year earlier."

"Large leveraged buyouts have been scarce since the financial crisis," said the Bloomberg report. "Other technology companies, including disk- drive maker Seagate Technology Plc (STX), have attempted to go private and had the talks fall through over valuations or difficulty in financing deals."

A buyout of the $19 billion company would become one of the largest deals since the global recession, said the AFR.

Michael Dell (pictured) founded Dell Computers when he was 19 in 1984. The company had started in his University of Texas dorm room with $1,000. Dell, the CEO of the company, still owns 15.7% of the company. This helps as it makes "it easier for firms to put together equity financing for the deal," said the Bloomberg report. Dell, who retook the CEO position in 2007, said in 2010 he had considered taking the company private.

IDG News Service

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