How Would a Leveraged Buyout of Dell Work?

There is a good deal of skepticism around which way Dell Inc.’s (NASDAQ:DELL) leveraged buyout could go. While some think there’s just not enough to draw a buyer’s interest, others find potential reasons a buyout could be a good idea.

The situation

The PC market just hasn’t been the same since the advent of alternative computing technologies, particularly Apple’s (NASDAQ:AAPL) iPad. The shifting market dealt a heavy blow on Dell — the No. 3 computer maker — which lost 40 percent of its market value after a peak last year.

Start 2013 better than ever by saving time and making money with your Limited Time Offer for our highly-acclaimed Stock Picker Newsletter. Click here for our fresh Feature Stock Pick now!

The company is looking to make itself appealing to corporations to fill their technology needs, but the task would require some changes that could be difficult to complete under the watchful eyes of public investors. This has been suggested as one of the reasons Dell is seeking a leveraged buyout, as it would allow the company some privacy in its dealings and could facilitate acquisitions needed to turn the company in its desired direction…

The buyout

Considering Dell’s size and worth, a buyout could be one of the largest in years. In recent years, technology leveraged buyouts have averaged a 30 percent premium on share values, and if Dell received such a premium, its enterprise value could climb to over $22 billion. However, there is some doubt that Dell can pull it off, with one analyst at CreditSights estimating less than 50 percent odds the leveraged buyout will go through, believing a high leverage and taking equity off the table would put the company in a disadvantaged position to make the mergers and acquisitions it would want to afterward.

News of a possible leveraged buyout did excite investors, though, as Dell’s stock closed 7.2 percent higher after the news came out. Further signals that the deal may actually go through come with news that several banks are ready to provide financing. One buyout firm, Silver Lake Partners, appears to be leading discussions of a buyout with word that it may pay $13.50 to $14 a share for the company.

Michael Dell

While some may still be skeptical about the possibility of a buyout, others set their eyes on Michael Dell. Ranked the 22nd wealthiest person in the U.S., Michael Dell holds 244 million shares in Dell — or a 14 percent stake — and has $14.6 billion dollars to his name. Michael Dell could prove pivotal in seeing that a deal goes through in order to make the company private.

Don’t Miss: Will Dell Go Private or Not?