Is Dell Just in Time or Out of Time?


Stocks opened down this morning, with the Dow Jones Industrial Average and the broader S&P 500 Index losing up 0.3%, and 0.17%, respectively, as of 10:05 a.m. EST.

Will Dell seal the deal?
On Monday, this column argued that a deal to take PC manufacturer Dell private "is unlikely to get far on the assembly line." Indeed, with Dell's current market value at roughly $23 billion, a going-private transaction would be the largest tech leveraged buyout, or LBO, ever, as well as the largest LBO of any kind since the onset of the credit crisis.

On Tuesday, it emerged that one of the firms discussing an LBO with Dell is Silicon Valley private-equity firm Silver Lake Partners. Silver Lake is an experienced hand in this area, having led what was then the largest technology LBO -- an $11.3 billion consortium deal for SunGard Data Systems. The firm is in talks with four banks to provide the financing on the deal.

Nevertheless, the odds of completing the deal -- or earning a decent return on it, should it go through -- remain highly uncertain. Prior to the news of the deal, Sanford Bernstein analyst Toni Sacconaghi suggested that Dell was worth $12 a share on a sum-of-parts basis, with the PC business representing $4.70 per share. The trouble is that the latter value seems to be melting like an ice cube in the desert. On Monday, research firm Gartner released fourth-quarter PC shipment data, and the numbers were edifying: Year on year, the total number of units across the industry contracted 5%. Dell's performance was blood-curdling, as the company shipped 21% fewer units -- the worst performance of any major manufacturer.

Dell pioneered a direct-to-consumer sales model relying on just-in-time manufacturing. However, with the industry adapting and shifting east, the predator has become prey. Dell's current share price does not provide an adequate margin of safety to account for the decline of its PC business. SunGard, which Silver Lake Partners has kept private significantly longer than a typical LBO, ought to provide an object lesson regarding the risks of a Dell deal.

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