Investors have been speculating for a couple of years now that Michael Dell could eventually take his computer company private, after leaving the option on the table in multiple press interviews. His large stake as founder and CEO (about 15% of the company) coupled with his transformation plan and lack of respect on Wall Street (for the stock, not himself) all make a leveraged buyout seem logical. With news that a deal is being negotiated and could be finalized shortly in the $13-$14 per share range, I think the deal makes a lot of sense and others might take Dell’s lead and follow suit.
All of the ingredients required for a successful LBO are there in Dell’s case. The stock is so unloved on Wall Street that even after a premium is attached to the shares (which were hovering around $10 before news of the deal discussions leaked) the company can be had for a very attractive price. The company generates about $4 billion of cash flow annually, with $3.5 billion or so left over after capital expenditures. With a market value of around $23 billion, which excludes $6 billion of net cash on the balance sheet, Dell and his group would be paying about 4 times EBITDA.
Bears on the stock will be quick to point out that Dell still gets the majority of its revenue from desktop and laptop computer sales and that business is in decline thanks to the emergence of powerful smartphones and tablets. Indeed, that is why the stock has been pressured lately and accounts for the meager enterprise value assigned by the public market, but it also ignores the transformation plan that Dell and his team have slowly been implementing. While PC deterioration is offsetting the financial benefits of the company’s move into the corporate world of servers, storage, security, and services right now, over time that side of the business (which is both Dell’s current focus and future) will overtake the PC side and allow the company to continue to book strong profits. Once PCs dwindle to 20-25% of the business over the next several years, Dell can re-IPO and the LBO investors can cash out big time. At that time, Dell will look more like IBM than HP.
So why might other companies seen as “old tech” go down a similar route as Dell? First, it makes it a lot easier after someone else does it first, as it gives credibility to the idea. Companies heavy into PC-related businesses are not going to get respect from Wall Street going forward. Dell’s pre-deal P/E ratio of 6x proves that. After a while, the frustration mounts and staying public loses its luster. Hewlett Packard is likely going through a similar thought process right now, even though they are far behind Dell in orchestrating a solid transitional game plan. Even PC-related software companies like Symantec are being painted with the same brush and could explore the idea of going private. Anti-virus software is simply seen as yesterday’s technology and lacking growth potential.
All in all, this Dell LBO idea makes a lot of sense on multiple fronts, and while other companies might not have as many strong cards to play to make a deal like this work, I bet a finalized Dell deal prompts a lot of discussions in board of directors’ meetings across the industry in coming months.
Full Disclosure: Long SYMC at the time of writing, but positions may change at any time