Dell sold to private equity for $US24.4 billion as PC market hits a blue screen

The PC industry has been dealt a massive hit this morning, after iconic computer maker Dell confirmed rumours the business would go private once again in a deal worth $US24.4 billion, with buyers including the company’s founder, private equity and Microsoft.

The move to delist has been rumoured for some time, with Dell shares suffering over the past few years due to the industry’s move towards tablets, smartphones and online services. Taking the company off the NASDAQ will ensure the company can operate outside of Wall Street expectations.

But this change is why some analysts believe the switch to private equity won’t necessarily save the company. Rodney Gedda, senior analyst for tech research firm Telsyte, told SmartCompany this morning the restructure is just the beginning.

“I think this move is related to the decline of PCs as much as Dell not taking opportunities to move into new areas faster,” he says.

“Perhaps with the buy-out, they’ll be able to benefit more…but you can hardly expect just a change in management structure and equity to cure all the cancers.”

Michael Dell’s story is the stuff of Silicon Valley legend, having started in his garage at 19 to running one of the largest computer companies in the world.

The new deal will see shareholders paid out $US13.65 per share, above the stock price of $US10.88 recorded before rumours of a buyout first emerged. However, that figure also marks a huge decline from a share price as high as $US25 when Dell became chief executive once again six years ago. At its peak in 1999, the business was trading at $US56 a share.

The deal will see the company bought by a group including Michael Dell, equity firm Silver Lake and Microsoft. Dell will use his 14% stake in the business, along with some of his $US16 billion fortune, along with the Silver Lake equity firm.

Microsoft will offer a $US2 billion loan for the sale. The remainder will be funded through a series of banks, totalling $US15 billion in debt – some analysts have already questioned whether the company can remain nimble under such harsh financial restrictions.

But Dell sounded confident in a release, saying he recognises a restructure “will still take more time, investment and patience”.

“I believe our efforts will be better supported by partnering with Silver Lake in our shared vision,” Dell said.

The shift off the NASDAQ is a reflection of both the shrinking computer industry and Dell’s inability to shift gears.

According to the latest figures from IDC, PC sales fell by a faster than expected rate during the fourth quarter of 2012 – by 6.4% compared to the same corresponding period in 2011. Most users simply don’t need a full desktop computer for the internet needs, and instead opt for smartphones and tablets.

PCs are now mostly being used by a few main sectors, such as the enterprise market, alongside professionals such as web designers and software developers. Many of these types of companies tend to build custom PCs, bypassing sellers like Dell altogether.

Gedda says the future for Dell is in client services, mostly aimed at the enterprise market.

“I think it’ll be a while before Dell pulls out of the client space like IBM, but having said that the cash cow is in enterprise software and services, so we can expect to see more things from that area, including cloud services.”

Dell has been dabbling in cloud services for some time, but the private equity shift should boost its schedule. Gedda also points out the company has been talking about opening a local Australian centre for some time.

“Private equity buyouts tend to be ruthless with deadwood in the company. So you could see a lot stripped from the business sooner rather than later.”

“If areas are underperforming, they could find themselves on the chopping block.”

Dell already announced a large number of layoffs last year, with thousands of workers cut from the payroll last year. In the third quarter of 2012 the company announced a massive 47% drop in profit.

Michael Dell himself has been the subject of criticism over the past years as his company has faltered. He famously said in 1997 that if he owned Apple – now the largest technology company in the world – he would have sold the business and given money back to shareholders.

The move to a private equity buyout is only the latest shift in the dedicated PC-maker market. More recently, HP has been undergoing a significant restructure under the leadership of Meg Whitman.

 

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