Dell Q4 Earnings Could Harm Efforts to Go Private

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Personal computer assembler Dell Inc. (NASDAQ:DELL) reported a fall in sales, revenues and profits for the fourth quarter that ended in January.

However, the company’s financial performance bested Wall Street expectations and as such, its shares were saved from another brutal battering that we saw in the middle of November last time.

In fact, the stock has been on a recovery path, gaining nearly 8 per cent in the last 3 days. This is on top of the massive rally we saw in the shares after the decision to take the company private by founder Michael Dell and private-equity firm Silver Lake.

Dell Q4 Earnings Could Harm Efforts to Go Private

In the most recent quarter, the company’s revenue totaled $14.3 billion, down 11 per cent from same period a year ago. It was still better than the $14.1 billion analysts’ were expecting.

Sales dropped sharply in most categories including notebooks, desktops and third party software and peripherals with enterprise sales being the only bright spot. Dell’s earnings stood at $530 million in the latest three months, down more than 31 per cent from $764 million in the quarter a year earlier.

Despite these morbid numbers, the stock did not show any signs of selling pressure. What is driving the stock is also interesting and the private/public debate has a strong bearing on stock’s movement.

The market is clearly divided into two factions – one with bearish undercurrent and another which believes the company’s stock price provides a far higher discount to its business fundamentals than what is deserved. It was not very far in the past that the bear cartel had an upper hand but things have changed dramatically lately after Dell Inc. (NASDAQ:DELL)’s recent decision to go private in an $24.4 billion deal.

There is little doubt that Dell still represents immense value; however, it is debatable whether the value is high enough to carry out a buy back. The management certainly feels that a privately held Dell is more valuable than a publicly held one.

The street, till last quarter, believed Dell was on its way to become another Hewlett Packard and thus was stripped of premium valuations. This was logical in view of the rapidly shrinking margins and falling sales. It is not that the world around Dell is crumbling, but the company remains at the receiving end invariably.

According to market research firm Gartner, global personal computer shipments dropped 4.9 per cent in the fourth quarter of 2012 as more smartphones and tablets replace traditional computers for many tasks. However, the decline was sharper for Dell at 21 per cent.

What has changed in recent months is only that now there is a buyer at higher rates which has instilled confidence in smaller investors. Michael Dell’s enthusiasm for taking the company private is understandable but Silver Lake’s involvement is noteworthy as private equity companies usually are not known for holding their investments for long. It is not surprising if Michael Dell harbors plans of eventually buying out its private equity partner a couple of years down the line.

With more and more rectal buyers shifting to tablets and smartphones, and given Dell Inc. (NASDAQ:DELL)’s absence in these segments, it is difficult to see a long term upside for the business, even if held privately, away from public scrutiny.

Dell’s strong footing in Enterprise business is a shot in arm but a constant stream of newer players means existing companies cannot charge premium. This is what is plaguing Hewlett-Packard Company (NYSE:HPQ) which has seen its margins coming down sharply in the recent years, adding concerns to a stagnant top line.

Probably the only meaningful except to this trend is Chinese firm Lenovo, which given its strong focus on new markets and lower priced products, has managed to boost revenues and profits.

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