Recent press reports indicate that Blackstone may offer a deal that is superior to the $13.65 per share ($24.4 billion) offered by Michael Dell and Silver Lake Partners. The latest report from Bloomberg states that Blackstone has approached Oracle Corp. President Mark Hurd about running Dell Inc. (NASDAQ:DELL). Hurd is also the former CEO of Hewlett-Packard Company (NYSE:HPQ).
The sobering reality is the PC business continues to deteriorate with market research firms now forecasting double-digit unit declines in 1Q13. Many believe that an already high debt load will likely limit a buyout team’s ability to raise its offer materially from current levels.
How Much Higher Can It Go? One question investors ask is how much higher can a buyside group offer than the current $13.65 per share proposed by Silver Lake Partners and Michael Dell? The answer is that it depends on how bad one wants to get a deal done! But besides the obvious the following two factors are key:
(1) how much more debt are investors willing to incur and (2) how much more equity are buyers willing to put in? On the one hand, carrying more debt would mean more interest payments (not to mention a potentially higher interest rate) that would end up soaking up more of its cash flow. And on the other hand, increasing the equity invested could increase the risk and lower the rate of return. For these reasons, there is a limit in how much higher a bid can be raised before it becomes unattractive for the buyers. Its anyone’s guess what that price is exactly.
Despite efforts to transform itself with $13 billion in acquisitions since 2008, Shaw Wu of Sterne Agee estimates that about 70% of its business is tied to PCs that is under secular and structural pressure from mobile devices. This is 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, Wu estimates that 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.
Dell has struggled to make a mark into newer product segments like smartphones and tablets. On the other hand, Lenovo focused on its PC business and was able to gain market as well as mind share across geographies. Lenovo overtook Dell as the second largest player in the market in 2011.
