Rumors say Dell again thinking of going private

A merger with Samsung would probably be a lot less stupid


IT supplier Dell is rumored to be thinking about taking itself private, getting out from under the expectations of Wall Street and going under the thumbs of the private equity firms that would fund the self-acquisition.

According to a report at Bloomberg, which claims to have talked to two people "with knowledge of the matter," Dell is talking to private equity firms to buy up its 1.46 billion common shares in its public float, and leave the NASDAQ stock exchange. The Bloomberg report also says that several large banks were approached to provide financing for the deal – which would not be cheap at all.

As El Reg goes to press, Dell's shares have spiked up on the news by 12.6 per cent, giving Dell a market capitalization of $18.9bn and $2bn more than it had at Friday's close of the market last week.

A cynic could say that although Dell may be approaching banks in earnest to see if it makes sense to go private – particularly considering the low interest rates for borrowing at the time – the Round Rock, Texas, company may also be just testing out the idea to see what Wall Street would think about it.

But what seems more likely is that Dell didn't want anyone to find out about its financial explorations.

This is not the first time that founder, chairman, and CEO Michael Dell has floated the idea of going private. Back in June 2010, when Dell was in the middle of its transformation, adding software and services to its market basket, Dell (the man) conceded that he had considered going private with the company that bears his name.

The company's stock shot up that day by 5 per cent and its market cap was around $27bn, and with the transformation more complete if not finished, Dell has lost around $10bn in value as far as Wall Street is concerned. And that is after spending $10bn doing 20 deals to add services and software revenue streams with higher margins than it can squeeze out of its server and PC business.

Dell made a lot of noise about its aspirations to be a $60bn company a decade ago. It eventually hit that figure in 2005 thanks to its expansion in servers and despite ditching smartphones. The company was planning to hit $80bn in revenues in the late 2000s, but that didn't happen – in fact, the Great Recession smacked around Dell's PC and server businesses.

Even with diversifying into software and services, Dell still only posted $62.3bn in revenues and $3.5bn in net income in its fiscal 2012 ended in January, and through the first three quarters of fiscal 2013, the company has taken a 7.4 revenue hit. Net income is down 32.5 per cent and is running at half the rate of all of fiscal 2012.

This is obviously a problem for both Dell (the man) and the company's other shareholders. Dell (the company) has done a great job of eating server market share in the past year, is bucking trends, and is gradually getting its storage and switching acts together to compete against IBM, HP, Cisco Systems, and others.

The trouble seems to be the same as at rival HP: Dell is dependent on the PC business and is not peddling alternative endpoints such as smartphones and tablets. Perhaps more importantly, it does not have the services that boost the bottom line. If it's hard to compete against Apple, it is truly difficult to compete with Cupertino after it has so many generations of smartphones and tablets in the field and the iTunes and iCloud services behind them.

Dell has $14.2bn in cash and investments (both short and long term), which may sound like nearly enough to take the company private, but it also has $3.7bn in short-term debt and $5.3bn in long-term debt, so the company's net cash position of just under $2bn. It would have to liquidate its remaining $9bn in investments to buy shares back.

Michael Dell owns a 15.7 per cent stake in the company, so those shares don't have to be purchased if Dell wants to stay at the company and still run it – and it's hard to imagine this not being the case.

Still, if you wanted to pay Dell shareholders a premium over even Friday's closing stock price, you would have to come up with a serious pile of cash to take Dell private, and servicing that debt load, even with low interest rates, would have consequences for the company.

In many ways, borrowing from Wall Street and disappointing them is cheaper than going into hock over your head.

What Dell probably needs to do is stop thinking about selling itself or buying itself, and start thinking about how it can get into selling the products consumers want. Samsung Electronics is widely believed to want to get into servers, where Dell already plays, and already has facilities in Texas.

Lawsuits with Apple aside, Samsung is a serious player in smartphones and as good as anyone else without an Apple label at cranking out fondleslabs. Maybe Dell should merge with Samsung – a real merger, not an acquisition – and stop making bankers and private equity firms rich and start thinking about winning the next round in the battle for our hearts and minds in our pockets, in our homes, and in our data centers.

This rumor about Dell going private may or may not shed light on why biz gobbler-in-chief David Johnson, who came to Dell from IBM to lead its acquisition binge, left at the end of last year to take a job in the private equity side of Blackstone Group. ®

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