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.
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.