Would Dell be better off as a private company? If it goes private, will it even remain a company, or are we looking at the next Polaroid -- sold for scraps. A Dell buyout would likely satisfy investors who have witnessed a 40%drop in stock price over the last five years, but is this the only way to initiate that price reversal? Let's look at what it will take for Dell to go private and how investors should look at the troubled PC purveyor.
Bad news first
For those few who are holding out for a Dell turnaround, this was just about the last thing you wanted to hear. Leveraged buyout (LBO) firms begin circling around a company when they pick up a dying scent. Confirming the state of Dell even more has been its willingness to hold these discussions for the last month or two. Its top brass seem to be admitting that they have run out of ideas for reversing the fortune of public entity Dell.
Now, is this all bad? Not necessarily. Many companies have gone private only to reemerge a better company. Though not technically private, General Motors was taken off the exchanges, held by the U.S. government, and debuted a couple of years later a leaner, more agile machine. Also, some companies just seem to do better as privately owned entities, like S.C. Johnson (a family company). Dell may benefit by removing itself from the public eye, reorganizing the company, and doing some things that it wouldn't otherwise be able to with Wall Street watchdogs on the prowl.
Shareholders will also get a nice reward. According to The New York Times, LBO firms paid an average 30% premium for technology companies in 2012. Even with Dell's two-day gain of nearly 20%, there is still some attractive and probable upside for the company in the event of a buyout.
Before we get too trigger happy on a Dell takeover, though, what are the chances of it happening?
Even though people have seemingly left PCs in the dust, Dell remains an impressive $22 billion (with this week's gains included) company. If we factor in that 30% premium mentioned above, that yields a takeover price of $28.6 billion, which is, of course, no small price tag even for some of the world's largest buyout shops. This doesn't necessarily matter in isolation, but it's important to take into account the massive scale involved in the potential buyout.
From what I can tell for private equity companies to lead the charge, it would need to lay down a huge chunk of change -- something like $7 billion to $8 billion. That's already a daunting amount, ignoring the remaining $20 billion to come from loans. For this deal to go through, there will have to be a few major P/E shops in on the deal to come up with the down payment, and then a small army of lenders to shore up the balance. It raises the question: Is this feasible in the current economic environment?
On top of these already steep challenges are tax considerations and Dell's current debt load -- around $5 billion. If Dell's private owners expect a decent return on their investment, that could likely mean they are looking at either some major improvements in the business or to get as much for the pieces as possible.
The bottom line
The next couple of weeks will certainly show us more concrete information. In my opinion, the company isn't DOA at this point. Regardless of slowing PC sales, there are ways the company can leverage its cash ($11 billion) and massive operations to shift back into relevancy. For evidence of this, I look right at IBM.
As for investors, take comfort in knowing that if a deal goes through, you get an extremely early Christmas present. If you are considering initiating a position based on this news, however, I would caution you. This is a big, big deal and I would not be surprised to find many hiccups along the way. Use extreme caution if you are tempted to play the buyout. As always, never take a position beyond your realm of understanding or outside of what is personally financially sound.
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The article What You Need to Know About a Dell Buyout originally appeared on Fool.com.
Fool contributor Michael B. Lewis has no position in any stocks mentioned. The Motley Fool owns shares of IBM. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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