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Dell faces challenges in private buyout plan, analysts say

Dell's market capitalization and recent transition struggles could create problems in finding potential investors

By , IDG News Service
January 15, 2013 02:21 PM ET

IDG News Service - Dell's high market capitalization and its recent struggles to transition from a commodity PC supplier to an enterprise IT vendor mean that multiple private equity firms would have to invest in the company for a buyout to be possible, analysts said Tuesday.

Bloomberg reported Monday that Dell was in negotiations for a private equity buyout, which was later confirmed by The Wall Street Journal.

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Dell spokesman David Frink said the company does not comment on rumors or speculation. Dell's share price rose Monday after the reports surfaced and that trend continued into early Tuesday afternoon Eastern Time, with shares trading at US$12.69.

A buyout could help Dell focus on long-term goals by removing the company from the pressure of Wall Street to perform well financially. But questions remain around the company's long-term viability because of its recent financial struggles, executive departures and structural viability with a heavy reliance on the low-margin PC business, analysts said.

Placing Dell's market capitalization at around $21 billion, Sterne Agee financial analyst Shaw Wu on late Monday said a private equity buyout is not likely as it would require "sizable financing" involving multiple private equity firms to meet the buying price, Wu said. He also questioned the stability of Dell's structure and business.

But other analysts put more credence in the reports.

A buyout by private equity firms could be valid as the company is transitioning from a supplier of commodity hardware, mainly traditional personal computing, to being a supplier of enterprise-grade IT infrastructure, said Carter Lusher, chief IT analyst at Ovum, in an email.

"Dell's ambition is nothing less than offering the entire IT stack with supporting services. While this transition has been going on for several years, there is still much that has to be done," Luster said.

If the reports are true, Dell is trying to make the transition from a public to a private company with the albatross of meeting quarterly earnings expectations hanging around its neck. But investors are myopic and only care about next quarter's earnings per share, Luster said. Dell reports its next quarterly earnings on Feb. 19.

"Going private in order to make the major changes needed to remake the company makes strategic sense. However, going private is not a panacea as there is a heavy cost associated with that change of ownership structure. If Dell does not have the right private equity partners it could find itself in a worse situation than being a public company," Lusher said.

Dell in recent years has been restructuring its business to move away from low-margin PC products and into the enterprise business to increase profitability. The company has reduced its lineup of low-priced PCs and increased its high-priced offerings in an effort to improve margins in the competitive PC market. The company has also been on an acquisition spree with the goal of offering a complementary stack of services, software, networking, storage and server products.

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