How does a buyout help Dell?

How does a buyout help Dell?

Summary: Rumors are circulating that Dell is the focus of a buyout. Would that fundamentally change the company's position and help it to break free from its reliance on the PC industry?

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TOPICS: Dell, Hardware, PCs
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There's been a lot of chatter lately that the PC-maker Dell is the focus of a private equity buyout in a deal that could be worth anywhere between $22.6 billion and $24.4 billion. There's even a rumor that Microsoft could be willing to chip in a few billion.

But how exactly does this help Dell?

The problem with Dell is that the company is far too reliant on the PC industry for its success. It was one of the PC OEMs that, in the late 1990s and early 2000s, kicked off a price race to the bottom by aggressively slashing profit margins in the hope of gaining market dominance, a move that made it hard for any player to turn a profit selling PCs.

Now that the PC market has stagnated as people spend their hard earned dollars on tablets and smartphones rather than Windows-powered desktops and notebooks, the company is having a hard time carving out a new market.

Sterne Agee analyst Shaw Wu believes that despite trying to reform, Dell continues to be a PC company. Wu estimated that 45 to 50 percent of the company's revenue comes from desktop and notebooks, and another 20 percent from non-PC businesses that are highly tied to PCs.

See also: 'Lack of innovation in the PC product cycle' spells problems for Intel: analyst

Despite carrying out over $13 billion worth of acquisitions since 2008, Dell is having a hard time breaking free of the PC.

Wu also considered how a buyout would help Dell. He pointed out that, while going private would take the company out of the limelight and public scrutiny, and will eliminate "the quarter-to-quarter grind of being a publicly traded company," this wouldn't do much to improve the company's fundamental position.

"The reality is that ever-increasing competition from Lenovo, Asustek, Apple, Google, Acer, IBM, HP, Samsung, and Cisco isn't going away by going private," wrote Wu in a note to clients. Another problem with going private that Wu highlighted is that by not having publicly traded stock, Dell could find it more difficult to make "larger, transformative acquisitions, as the company will likely spend the majority of its cash flow servicing debt interest."

On the flipside, the buyout would give Dell some cash. According to Wu, Dell has $11.3 billion in cash and $5.3 billion in long-term debt, giving it $6 billion in net cash. Problem is, about 80 percent of this is overseas, which means that it would need to be repatriated and taxed if brought back to the US.

Topics: Dell, Hardware, PCs

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8 comments
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  • There is the flaw in you blog

    You say that the PC market has stagnated as people spend their hard earned dollars on tablets and smartphones rather than Windows-powered desktops and notebooks. But that doesn't explain how companies like Lenovo, Asustek, Apple, Google, Acer, IBM, HP, Samsungcan make a profit from PC's. You conrtidict yourself as you go along. Tablet sales are nothing compared to PC sales, while everyone with a phone still buys new computers when needed. You did hot on the reason, but never realized that you did: competition.

    It's getting harder for a company like Dell to make a profit when its competitors can build a PC cheaper then they can, while selling at at the same price as Dell does.
    NoMore MicrosoftEver
    • Google makes PC's now?

      "You say that the PC market has stagnated as people spend their hard earned dollars on tablets and smartphones rather than Windows-powered desktops and notebooks. But that doesn't explain how companies like Lenovo, Asustek, Apple, Google, Acer, IBM, HP, Samsungcan make a profit from PC's."

      I'm pretty sure apple doesn't, either (the price are far to high to be considered 'personal'. Plus, they don't fit the criteria; I.E. "Windows-powered desktops and notebooks").
      icyrock
  • Isn't it true

    Emerging markets in Latin America and Asia are buying more PC's? Of course Dell has also gained some low quality notoriety to stifle that, on top of Lenovo and Samsung crushing them.
    D.J. 43
  • A part of the story is that Dell has lost its way even in the PC Industry

    I do not agree witht he fact that Dell gained market share solely by selling computers cheaper. It had a USP. It build every computer unique for you. You could customise your PC online as you wanted it.
    However for many years already the customisations on the Dell web site are little more than cosmetic. Yes you can choose what warranty you want, if you want MS Office installed etc, but most of the main customisations are not relevant. E.g. choose between a 500GB and 750GB HDD. Why not 1TB or 2TB when those are available on other options.
    Dell basically is nothing more than another retailer/distributor selling standard generic PC's. Even corprorate buyers are turning away from them, as they no longer add relevant value.
    Non PC products they have launched have been 'average' at best and not price competitive.
    frank@...
    • You've hit the nail on the head

      Whenever I look at computers on Dell I can never find what I want. The site is so convoluted, you have 5 different versions of the same computer, each one with a different set of options (if configurable at all) and sometimes if you start with two different base machines and configure them to be identical you end up with two different prices!! It's utter madness.
      I just want to pick a type of machine, select CPU, select GPU, select Disk, etc. and get the best price at the end of it!

      If they improved this customer experience and made it so you just find what you want their sales would go through the roof.
      mog0
      • I've encountered the same situation ...

        Too many base configurations that seem to be the same; lack of detailed specs that might help to differentiate between two computers; multiple entry points that seem pointless except to confuse the price.
        bkshort@...
  • Breaking free

    A private equity buyout would give Dell greater freedom to try new things, but if MS is to take part of this (has has been reported) one has to ask why MS would invest megabucks in a company looking to reduce its reliance on the PC industry, except perhaps to make Windows tablets.
    John L. Ries
  • Concerns for Dell customers

    Since this is obviously a time for a big re-think on what Dell should be, I'm really wondering where this is going to leave all the Dell acquisitions over the past few years. Many companies have tried to re-make themselves and not regained their former glory. IBM went from a computer manufacturer to a services company (while still very profitable; they're not the leader they once were), Novell tried to hop on the Linux bandwagon, Microsoft thinks it needs to chase Apple (who's now in Samsung's shadow), and Dell has been trying to become a software company in the past couple years.
    ChrisAdaline