Can This Problem Hold Dell’s Deal Back?
With its share of the personal computer market hovering behind Hewlett-Packard (NYSE:HPQ) and Lenovo (LNVGY.PK), and its stock price losing almost a third of its value last year, a leveraged buyout does not seem out of the realm of possibility for Dell (NASDAQ:DELL). But while a report published in Bloomberg, indicating that the company had been discussing plans to go private, caused shares to shoot up by as much as 18 percent on Monday, not everyone was convinced of the agreement’s plausibility.
Private equity investor Wilbur Ross told CNBC on Tuesday that there was only a “50-50” chance that the computer manufacturer will be taken private in the rumored $20-million-plus deal. The reasons for the partnership potentially not going through were not Dell’s mismanagement or its bad balance sheet necessarily, but the fact that the company was so far behind in the latest technological trend: the tablet.
Those problems have made it an unappealing venture for the many public firms that the company’s founder, Michael Dell, courted for a takeover. Now, as Bloomberg noted in its report, the company is looking to make a private equity deal, which may not be the best option. Private equity deals are “about fixing a business and creating more value for the players involved,” correspondent Jon Erlichman explained on Bloomberg Television.
“The real hurdle would be [if] the LBO’s leverage sponsors and equity sponsors buy into the theory that it was really going to turn around quickly,” said Ross, who invests in financially distressed companies. “Remember [Dell] is a company whose earnings have been in a kind of free-fall.”
Dan Primack, a senior editor at Fortune, outlined similar concerns to CNBC’s “Squawk Box.” In his estimation, the deal could be too risky for its potential financiers, TPG Capital and Silver Lake, because bankers would be effectively taking a bet on the health of the personal consumer industry. “You’re not buying into a great growth story,” Primack said. He gave the deal a 20 percent chance.
Dell’s falling profitability is closely linked to the fortunes of the personal computer, a segment that makes up 60 percent of its profits. In the six years since the company’s founder resumed control of the company, its market share has steadily shrunk and its stock price has dropped by 49 percent. Dell’s built-to-order personal computers are no longer demanded by customers, and the company has taken only tentative steps in the tablet market.
Sanford Bernstein analyst Toni Sacconaghi told CNBC on Monday that a sale would be more feasible if the company was split into a PC business and an enterprise business.
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