It looks like the decision to take Dell private is just about done. In one of the largest buyouts since the financial crisis started, this buyout is aimed at making Dell more nimble as a company.
Michael Dell will be providing 16 percent of Dell equity towards the deal along with his own cash from MSD Capital. Microsoft will loan $2 billion on a 10-year subordinated note with 7-8 percent interest. Other firms like Silver Lake will also help finance the deal. The price of the buyout is at $13.65 per share which is a 25% premium over Dell’s stock price prior to the public knowing about the buyout.
In recent years, Dell has struggled to keep pace with competitors like HP, Apple and other Asian rivals like Lenovo. When tablets, smartphones and game consoles took hold in the market, Dell reacted too slowly with poorly supported and designed products. Their worldwide market share of PC sales has declined to 10% compared to 12.5% a year earlier and continues to dwindle.
The reasons are simple: Dell products were built with quality and service but due to the intensely competitive nature of the market with razor thin margins, Dell followed the competition by producing low cost (and low quality) products that cost it market share. In addition, Dell faces a lot of overhead and complexity as a large public corporation which slows its ability down to react to market changes quickly.
Dell believes that by going private, it can cut costs without Wall Street scrutiny and focus better on providing software and service to large companies similar to HP and IBM. However, the risk Dell takes by going private is that it will have debt that will need to be repaid and will lack the ability raise capital as easily as a public company.
Dell isn’t expected to spin off its PC division similar to IBM since it still derives a significant portion of its revenue from it. In fact, David Johnson, a Senior Analyst at Forrester Research believes Dell will need the cash flow from its PC division to help it focus on areas that it needs to grow. As a result, its hoped that Dell will be able to simplify solutions and deliver a better end customer experience.