Dell Going Private at a Cost of $24.4 Billion

Posted on Feb 5 2013 - 4:54pm by Brian K.

Michael Dell

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.

Source: Dell to go private in landmark $24.4 billion deal | Reuters.

 

 

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3 Comments so far. Feel free to join this conversation.

  1. svl7 February 5, 2013 at 5:09 PM - Reply

    They should stop selling all the non-notebook and desktop stuff like printers, beamers and also all the accesoires like backpacks etc. … I can’t imagine that’s a very profitable section for them.
    Instead it would be great if they focused on quality notebooks, listen to demands of their customers when it comes to the high-end segment and further improving their server stuff.

    • Brian K. February 6, 2013 at 11:15 PM - Reply

      Yes I agree, they should have never pursued the low end with the rest of the pack. Instead they should have pursued a similar strategy as Apple by offering quality notebooks with innovative designs that nobody else offered. They used to do this back in the 90s and early 2000s but then employed their throttling + cheap quality directive and since then their market share has fallen by the wayside. Hopefully things change for the better with the company going private.

    • tigyi May 8, 2013 at 8:25 PM - Reply

      I don’t agree; the printer ink, cases, and all the accessories is where the margins are. There is not much margin in hardware; and for how quickly they become obsolete, a hardware exclusive company would be constantly chasing their tail remain afloat. – I like dell hardware (using an M6600 at this moment) – but for any company to manufacture high quality gear the money has to come from somewhere – If they could manufacture quality equipment as a loss-leader in support of their more profitable items (ink, cases, accessories) and attempt some r&d for new pattens for market leading items, the company may be in a more positive place. I wouldn’t think it would be smart to spill money into quality hardware without having more than just a marketing edge over the competition.

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