Dell in Talks to Go Private

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Dell’s stock is on the rise after Bloomberg issued a report stating that the PC maker is in buyout talks with private investors. The move is coming after a slow year for the personal computer manufacturer, as the company lost a third of its value last year.

According to Bloomberg’s unnamed sources, Dell is currently in talks with TPG Capital and Silver Lake equity firms. The sources went on to say that deal is possible and could be announced as early as next week. The sources also noted that difficulties still remained as the two firms may not be able to acquire the necessary funds needed to purchase the PC maker.

According to the WSJ’s MarketWatch a buyout is feasible, but it will be difficult. Deutsche Bank analyst Christ Whitmore said Tuesday that the leveraged buyout of Dell “looks good on paper”; but he also noted that the deal would amount to roughly $21 billion dollars, providing a sizeable hurdle for the two equity firms looking to execute the transaction.

Going private could prove a godsend for the third-largest PC manufacturer, as it would provide the company with the flexibility needed to make  drastic changes without the worry of meeting quarterly goals or answering to shareholders. Mizuho Securities USA Inc. analyst, Abhey Lamba explained to Bloomberg that going private would allow CEO Michael Dell to become more focus on the company’s long-term goals; as ‘he wants to de-emphasize about two-thirds of his business, and that’s a hard strategy to push because it would mean overall revenue will shrink.”

The market seems to share this perspective, as news of Dell potentially going private caused the company’s stock jump more than 15% since Monday, with shares now trading just under $13 a share.

While the market has responded positively to the news, many analysts remain unconvinced that the deal will occur. Analyst Scott Craig from Bank of America/Merrill Lynch told MarketWatch that a buyout was unlikely. Craig noted that the large risks of the deal simply do not meet the potential return. Craig estimated Dell could yield a potential 10 to 15 percent return to its investors due to its large cash reserves, but typically private-equity firms require at least a 20 percent return to make such a deal.

Craig also noted the rarity of such a large deal, telling MarketWatch that there have only been 10 such transactions worth $20 billion or more over the last 20 years.  If the deal was to go through it would mark the largest private equity deal since 2007 with the $26 billion private takeout of Hilton Worldwide.

Another potential roadblock for the deal is Michael Dell. Analyst Scott Craig issued the importance of Dell’s CEO, telling MarketShare “to make the deal more financially attractive, we would assume that Michael Dell remains with the company and rolls his equity into the new capital structure. This may be a stretch as we believe Mr. Dell would likely rather run the company without having his ownership/managing power diluted.”  Michael Dell as the largest shareholder with 15% of Dell’s stock, could just as easily sell, which would make the company far less attractive to investors.

Goldman Sachs analyst Bill Shope still think Michael Dell is a selling point, he explained to MarketShare that “Michael Dell’s large equity position, and his sizable investment assets outside of the company, however, made a transaction more feasible in our opinion.” However, despite this Shope noted that deal will be difficult especially due to the tax effects on Dell’s cash outside of the United States. 

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