After weeks of haggling, Dell, the world’s third-largest computer maker, revealed a plan to take itself private on February 5th. If the proposed $24.4 billion deal is given a green light by the company’s shareholders, it will be the biggest leveraged buy-out since the beginning of the financial crisis in 2007. It may also mark the dawn of a new era for Dell: it is supposed to help it adapt to a technology world in which personal computers (PCs), the firm’s main business, no longer reign supreme—a result of the rise of smartphones, other mobile devices and cloud computing.
Under the terms of the buy-out, Michael Dell, the firm’s eponymous founder, will continue to have a substantial stake in the firm he started in a dorm room almost three decades ago and will remain its chairman and chief executive. He is committing a mountain of cash to finance the deal, which values Dell’s shares at $13.65 each—a 25% premium to their closing price of $10.88 when rumours of the move began leaking a in mid-January.
The proposed transaction has raised hopes that it will lead to a revival of leveraged buy-outs in the tech world after debt funding disappeared down a large black hole along with parts of the banking system. Other firms, such as Seagate Technology, a maker of hard disks and storage gear, have failed in recent years to pull off such deals because of lack of funding at attractive terms. Yet Dell’s deal may not herald an immediate return of big buy-outs because it relies heavily on leadership from its founder.
Mr Dell may be the driving force behind the transaction, but he has the support of deep-pocketed friends: Microsoft, which is contributing $2 billion in the form of a loan, and Silver Lake, a private-equity firm, which has helped to raise $15 billion in debt funding from banks. Investors will want to scrutinise the terms of the deal carefully—Mr Dell’s role as both chief executive of Dell and a big shareholder, some say, creates a conflict of interest.
Such worries, however, are unlikely to scupper the deal. Since Mr Dell returned to the company as chief executive in 2007, the firm’s share price has plunged by more than half. It has struggled to convince markets that it is moving fast enough to build up a business offering cloud-computing and other services whose profits will more than offset those being sucked out of its ailing PC arm. Freed from the constraints of quarterly reporting and having to worry about its share price, the firm should be able to radically restructure its legacy PC business and work hard to boost its revenues from companies looking for cloud computing offerings.
It is likely to get a helping hand from Microsoft, whose planned investment in the buy-out highlights a trend towards “reverticalisation” in the information-technology (IT) industry. Not so long ago the different elements of the IT “stack”, such as software and hardware, were mostly provided by separate firms. But those lines are rapidly blurring. Google, for instance, has snapped up Motorola Mobility, which makes phones and other gadgets. And Apple has demonstrated the advantages to be gained by cleverly combining devices and software.
Microsoft’s decision to invest in Dell is no doubt partly driven by its desire to support a firm whose products use its highly profitable Windows and Office programs. Microsoft also seems to be betting that it will benefit from Dell’s push into the cloud-computing business. But Dell faces stiff competition from a host of rivals, including IBM and HP, which have moved more quickly than the once-mighty PC maker. Mr Dell still needs to spell out clearly how being private will help his firm win in the computing clouds if he is to dispel the storm ones hanging over it.
© The Economist Newspaper Limited, London (February 5, 2013)