Now We Know Who’s Been Talking To Dell About Going Private

dude you're getting a dell first commercial
Are they getting Dell?

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Buyout firms Silver Lake Partners and TPG have held talks with Dell about taking the company private, the Wall Street Journal reports.Speculation about who could be discussing a deal with the struggling hardware company ran rampant yesterday when Bloomberg broke the news that talks were being held but didn’t disclose who Dell was talking to.

Dell’s stock rose 13% on the news.

Sources close to the situation said that a bidding group hasn’t been finalised yet, but pension funds could participate in the investment while JP Morgan handles the financing.

This isn’t the first time CEO Michael Dell has talked about taking the company private. He considered it in 2010 but then took the option off the table.

Now might be the right time, though. When the financial crisis struck in 2008, big leveraged buyouts became in possible because firms didn’t have access to credit. That has changed, and some analysts think Dell’s stock price is cheap enough to make this an interesting (though expensive) deal.

From WSJ:

That kind of figure could require buyers to come up with at least $7 billion of equity, based on other recent buyout financing, part of which could come from Mr. Dell’s stake in the company. The rest would be a large bill even for two or three firms to share. And in general, since the financial crisis, investors in private-equity funds have frowned upon such big group deals because of the risk they can entail.

A buyout of that type could also need in the range of $15 billion in debt, also a big chunk, especially considering that analysts and shareholders haven’t been hopeful about Dell’s business prospects.

That said: While Dell’s PC business has been struggling, (it lost its place as the world’s largest PC maker to HP back in 2006) there are other parts of the business that make investors optimistic.

On investment research site Sum Zero, Nicholas Snyder of Union Square Research pointed out that the non-PC business was now worth more than the PC business, and that Dell has been transitioning through that change fairly well:

From Sum Zero:

…it (Dell) has a number of great businesses (notably servers, storage, deployment and support services, and software), and a strong market position among the small and medium businesses that will increasingly be consuming IT services.

The concerns about the PC business are overblown and Dell’s transition to a contract manufacture model have given this business a lot of operational flexibility as was well demonstrated this year…

Unlike HP, Dell is not replacing lost PC revenue with expensively bought, non-synergistic, new revenue, but rather building out an end-to-end IBM-like services model at a lower price point. Dell has not had to take a write-down on any of their acquisitions, so at a minimum it appears they are not destroying value. Any way you slice it, this company is dirt cheap, regardless of what the PC business does…

So maybe we have a big LBO on our hands. Wouldn’t that be nice?