Dell Goes Private in $24.4B LBO

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After a month-long speculation, Dell Inc. (DELL) finally announced its decision to go private in a leveraged buyout agreement (:LBO). Founder Michael Dell will acquire the company at a purchase consideration of roughly $24.4 billion, much higher than the market expectation of $23.0 billion.

Dell’s shareholders will be rewarded with $13.65 per share in cash. The transaction is expected to be completed by the second quarter of fiscal 2014.

The LBO agreement has been signed by the founder Michael Dell, Microsoft Corp. (MSFT) and Silver Lake Partners (a private equity firm). The LBO will be financed by Michael Dell’s 15.7% stake and $700.0 million cash, $2.0 billion from Microsoft and $1.0 billion from Silver Lake, roll-over of existing debt and new debt financing.

The unconditional debt financing will be done jointly by BofA Merrill Lynch, Barclays, Credit Suisse and RBC Capital Markets. The purchase price reflects a 25.0% premium on the closing price on Jan 11.

Law firms such as Rigrodsky & Long, P.A., the Rosen Law firm, and Bernstein Liebhard LLP are looking into any instance of breach of fiduciary duty by Dell’s board of directors. Moreover, shareholders’ approval is pending. Any untoward situation could lead to a delay in completing the deal.

The idea behind the privatization is to stay away from public scrutiny and expectations and better focus on business growth and profitability. But Dell’s dependence on the PC market remains the main problem. Also, Dell lacks a firm footing in the servers, storage and cloud computing space, which is a sheer negative in comparison to IBM Corp. (IBM), EMC Corp. (EMC) and to some extent, Hewlett-Packard Co. (HPQ). Another competitor, Apple Inc. (AAPL) is dominating the tablet space.

Considering the situation, it is hard to predict Dell’s success story, unless the company opts for diversification.

Dell’s go-private strategy could also create other problems for the company. Without the support of public money through common shares, Dell will be required to pay high interest charges for its debt. If it is unable to generate desired results, the company could go out of business. This could prove to be an out-an-out positive for H-P.

On the positive side, founder Michael Dell (with his majority share) will be better positioned to decide operational and strategic changes that could help the company to come out of the difficult situation.

Improvement in the PC market is less likely in the near term due to the slower-than-expected adoption of Microsoft’s Win 8. But industry observers expect a marginal growth of 2.0% in PC shipments in 2013, which is a silver lining.

Currently, Dell has a Zacks Rank #4 (Sell).

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