Dell Inc. (DELL) Confirms Buyout, But Is It Smart?

Dell Inc. (DELL) Confirms Buyout, But Is It Smart?

Dell Inc. (NASDAQ:DELL) announced its intent to be acquired by Michael Dell and Silver Lake Partners for $13.65 per share in cash or $24.4 billion. While this was widely expected with shares 25% higher when speculation of a deal first surfaced in mid-January, the big question is whether shareholders will approve as it is only a slight premium to its current stock price. On the other hand, some may be glad to be “bailed out” and vote in favor as it hasn’t been easy being a shareholder over the last few years.

The buyers will acquire for cash all of the outstanding shares of Dell Inc. (NASDAQ:DELL) not held by Mr. Dell and certain other members of management. There is a go-shop period for 45 days. The breakup fee is $180 million for qualifying proposals during the goshop period and a $450 million fee thereafter. The deal is expected to close before the end of Dell Inc. (NASDAQ:DELL)’s second fiscal quarter. The transaction will be financed through a combination of cash and equity contributed by Mr. Dell, cash funded by investment funds affiliated with Silver Lake, cash invested by MSD Capital., a $2 billion loan from Microsoft Corporation (NASDAQ: MSFT), rollover of existing debt, as well as debt financing.

Still Mostly a PC Company Despite Big Dollars Spent. Despite the company’s strong efforts to transform itself with $13 billion in acquisitions since 2008, analysts estimate that about 70% of its business is tied to PCs that is under secular and structural pressure from mobile devices. This is certainly progress from 85%-90% in the early 2000s but proves that it is a much more difficult and slower transition than consensus thinking. In terms of segment detail, analysts estimate 45%-50% of revenue is from desktop and notebooks PCs and 20% from non-PC businesses highly tied to PCs including peripherals like monitors, printers and keyboards, as well as services and software.

Being private has advantages but also disadvantages. On the positive, going private takes the company out of the quarter-to-quarter grind of being a publicly traded company. But on the negative, not having publicly traded stock could make it more difficult to make larger, transformative acquisitions as the company will likely spend the majority of its cash flow paying private equity investors and servicing debt interest.

Analysts at Sterne Agee state that they are not sure Dell Inc. (NASDAQ:DELL) going private improves the company’s fundamental position. They note that the reality is that ever-increasing competition from Lenovo, Asustek, Apple, Google, Acer, IBM, HPQ, Samsung, and Cisco isn’t going away.