Will Dell Really Go Private?


At the Sanford C. Bernstein & Co. conference yesterday, Michael Dell said he has considered taking his computer-making company private. True, he was somewhat vague -- but it does show that he's being free-ranging with ideas on how to transform Dell (DELL).

The buyout talk has done little for the stock, though. So far in today's trading, the shares are off nearly 3%. But buyout chatter is likely to continue, especially if Dell continues to languish.

A leveraged buyout of the computer maker would be an enormous undertaking. Suppose a deal comes to a 50% premium, or roughly $20 per share. In this scenario, a buyout would amount to about $39 billion.

While private equity firms have been warming up to larger deals, this would be in another category altogether. Keep in mind that the estimated capacity is for transactions of $10 billion to $15 billion.

The Difficult Math

There are some factors that would make the size of a potential buyout a little smaller. First of all, Dell already has $11 billion in cash. Plus, Michael Dell owns 11.6% of the company, which would come to $4.5 billion (at the buyout valuation).

It's also common for the founder to rollover his or her equity stake in the company for a buyout deal. So as much as $15.5 billion would not have to be financed. In addition, Dell still generates substantial cash flows, which came to $4.3 billion over the past year.

But despite these considerations, a buyout would still require a tremendous amount of resources and would probably be difficult to pull off.

Getting Back on Track

Right now, Dell is in the midst of a turnaround, and things are going slow. If anything, the company's fall has been stunning. Its growth was clockwork from the early 1990s to 2006. But since then, the company has lost its No. 1 spot and is now No. 3, behind HP (HPQ) and Acer (ACEIF).

However, with Michael Dell at the helm, he's making the hard choices like layoffs and cost cuts. He has also been aggressive with acquisitions, such as with the deals for Perot and EqualLogic. But such changes take time, and yes, they would probably be easier as a private company. Still, that's probably not a realistic option now.