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The Dell deal: What would be different if company goes private? [Austin American-Statesman]
[January 20, 2013]

The Dell deal: What would be different if company goes private? [Austin American-Statesman]

(Austin American-Statesman (TX) Via Acquire Media NewsEdge) Jan. 20--At age 29, Dell Inc. is no longer the hot-shot investment story that once captivated the financial world.

The company's last stock split occurred nearly 14 years ago. Its stock price, even after a run up last week, is less than a quarter of what it was in 2000.

But, for all its ups and downs over the past decade, Dell is still the big dog of Austin technology.

With 14,000 workers in Central Texas, it remains the area's largest private employer. It is the most prominent local company with the biggest name recognition. It's also one of the largest companies in Texas that isn't in the oil business. It has generated enormous wealth that has found its way into investments in new companies and into donations for hospitals, museums and charities. Founder Michael Dell, who turns 48 next month, is one of the richest people in the country, ranking 22nd on last year's Forbes 400 wealthiest Americans list, with estimated assets of $14.6 billion.

While the Austin tech scene has expanded to include other successful companies, Dell is the one that hit the financial home run that others aspire to.

Now Michael Dell is attempting to hit another financial grand slam -- this time by taking his company private in a massive buyout.


He is reported to be working with a private-equity investment firm, Silver Lake Partners, of Menlo Park, Calif., to put together the biggest leveraged buyout deal the country has seen since the financial crisis of 2008.

By all reports, the deal was making rapid progress by the end of the week. Silver Lake had lined up other investors and put together a group of four big bankers that were expected to supply about $15 billion in debt financing to make the buyout work.

Bloomberg news reported Friday that the proposed deal might be announced publicly this week. But it would still probably take at least a few more months -- maybe longer -- to complete the deal.

Dell Inc. hasn't commented on numerous reports about the deal last week, and it had no comment for this story.

As last week went on, more financial analysts acknowledged that the deal was likely to happen and that it had a decent chance of success.

"It makes sense for Dell to go private," said stock analyst Brian Marshall with ISI Group. He can "fix the company behind the scenes and emerge as a smaller, more profitable, faster growing player a few years from now." Why is this happening now Dell Inc. is out of favor with stock market investors right now. It is a personal-computer-centric company in a world that has fallen in love with smartphones and tablets.

The company's revenue and profits are shrinking because the PC market is in the doldrums. Its stock price dropped 29 percent in 2012.

But all that could change in a few years if the company makes the right moves and completes its business reinvention project that is already under way.

More than one analyst has compared the Round Rock-based company to a banged-up race car. It needs time in the garage for repair work, they say, but it could re-emerge as a potential winner sometime later -- perhaps in three to five years.

Analysts say two main factors are driving the timing of the deal -- interest rates and the company's relatively low stock price.

Low interest rates mean that the interest expense on that estimated $15 billion loan for the buyout will be more manageable. Some analysts estimate the annual interest rate expense Dell might have to pay for such a loan would be in the range of $700 million to $800 million. That sounds like a big number, but it is only a fraction of the estimated $3.1 billion in "free cash flow" that analysts estimate Dell generated in the past year.

If Dell can keep generating sizable amounts of cash from its business, then it should be able to handle the interest burden easily.

The low stock price means the total price of doing the deal is less. That means investors don't have to borrow as much money. It also means there is potentially more profit to be made if and when the company goes public again several years from now.

And just what would Dell do to make itself more valuable Analysts expect the company will keep working on the business transformation that it has been working on for the past five years.

It has spent more than $12 billion acquiring more than two dozen technology companies, some of which are expected to become engines driving new growth as Dell tries to become a formidable one-stop-shop for information technology, or IT, advanced hardware, software and services needed by large and mid-sized businesses. Those kinds of products and services generally generate much stronger profit margins than do PCs.

In short, Dell has been trying to become a lot more like IBM Corp., the established kingpin of IT that has developed broad, deep and profitable business relationships with thousands of business customers worldwide.

Dell also has ties to thousands of business customers, but many of those relationships aren't nearly as broad and deep as it wants them to be. So the company is busy adding more sophisticated IT capabilities in order to create deeper, more profitable, ties to its customers.

Dell isn't changing on a whim. It is reacting to a profound movements in computing, which have diminished the traditional value of and spending on desktop and laptop personal computers. Those products continue to generate close to 70 percent of Dell's revenue, but they are no longer as profitable.

More businesses are adding smart mobile devices -- smart phones and tablets -- to add to the capabilities of their workers. Dell is weak in those product areas, although it has recently added a new family of business-oriented tablets based on Microsoft Corp. software.

Businesses also are pushing into new more cost-effective ways of handling information, such as cloud computing, where companies can rent computing capacity they need every month rather than buy expensive hardware. Dell is pushing hard to become a stronger player in cloud computing and related services.

Dell's stock price declined in 2012 because the company posted lackluster results in a weak personal computer market. Asian competitors, including China's Lenovo Group and Taiwan's AsusTek Computer, outmuscled Dell for sales of low-end computers. Some analysts expect Dell's revenue will drop by more than 8 percent and its profit will drop by more than 20 percent for the fiscal year that ends this month.

Despite those declines, Dell so far has remained profitable and has generated strong cash flow from its operations.

How would Dell change as a private company The best bet, analysts say, is that it will be able to make changes more rapidly and more secretively than a publicly held company can. It also would have to pay far less attention to what the Wall Street investment community thought about its business. Michael Dell's main responsibility would be to satisfy his other investors, most of whom would sit with him on the company's new board of directors.

"It would allow them to move more quickly to make the changes they want to make," said analyst Patrick Moorhead, with Moor Insights & Strategy.

"In the best case, they come into the private garage," the analyst added. "They get everything in order and they move more quickly than before and more secretively. Then they start taking business away from competitors like Hewlett-Packard Co., IBM Corp. and Cisco Systems. The perception about Dell starts changing. They keep taking more business away from the competition. And then they go public again.

"People need to see how they are hurting the competition." How would going private affect the company's operations in Central Texas Probably not that much.

Dell has grown in recent years to a sizable company with about 109,000 workers worldwide last year. But analysts say the company doesn't carry much fat. Its workforce in Central Texas is primarily tied to product engineering, sales, marketing, administration and some limited manufacturing for servers.

For the most part, those sorts of jobs would still be needed in the private company. If Dell decides to drop out of the consumer PC business however, it might need slightly fewer product engineers, fewer marketing workers and fewer sales people.

Of course, not all buyouts turn out well.

Some become overburdened by debt and go bankrupt. Others have to go through massive reorganizations to cut costs.

If Michael Dell wants a picture of a buyout deal that ran into trouble, he need only look 30 miles south from his company's Round Rock headquarters to Freescale Semiconductor Holdings in Southwest Austin.

"Freescale is a prime example of a deal that didn't go well," Moorhead said. "We have a company that is worth about half of what it was supposed to be worth and that is just covered in debt." Freescale has new management and new growth strategies, but the company has endured painful restructurings and shed thousands of jobs over the past several years.

And even now, six years after the buyout, it remains burdened by heavy debt.

Even if Dell cratered as a private company, Michael Dell would remain a rich man. His nearly 16 percent share of Dell Inc.'s stock -- worth about $3.5 billion -- represents only about one quarter of his estimated total wealth.

But, if the roof falls in on the company, other workers might not be so fortunate. Some unsuccessful buyout deals have wound up in bankruptcy court with massive business restructurings and job losses.

If the buyout works out as well as hoped, Michael Dell could be richer still.

"I am sure he has been thinking about this for years," Moorhead said. "He is well tied to the investment markets. And he has a sixth sense for what value is." ___ (c)2013 Austin American-Statesman, Texas Visit Austin American-Statesman, Texas at www.statesman.com Distributed by MCT Information Services

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