Dell faces challenges in private buyout plan, analysts say

Dell's market capitalization and recent transition struggles could create problems in finding potential investors

By , IDG News Service |  IT Management

Dell in recent years has been restructuring its business to move away from low-margin PC products and into the enterprise business to increase profitability. The company has reduced its lineup of low-priced PCs and increased its high-priced offerings in an effort to improve margins in the competitive PC market. The company has also been on an acquisition spree with the goal of offering a complementary stack of services, software, networking, storage and server products.

Private equity firms may have different visions for Dell's future and it may be difficult for investors to agree on a common business plan, which could be a thorn in Dell's plans for a private buyout, said Ezra Gottheil, senior analyst at Technology Business Research.

"They have to appeal to their new owners," Gottheil said. "It allows the company to have a long-term plan."

Dell is a mature company operating on a quarterly basis, and much like Hewlett-Packard, is being undervalued due to the low-margin PC business, Gottheil said. A private buyout could allow the company to set a long-term stable business plan without worrying about margins on a quarter-to-quarter basis.

The PC business is attractive to customers, but it remains an under-appreciated revenue generator that contributes to Dell's positive cash flow, analysts said. However, Wall Street does not preach patience, and a private buyout would take away the distraction of the company's share price and the need to answer to investors, media and financial analysts, allowing Dell to focus on long-term goals.

"It fits very well with Michael Dell's philosophy. He has long counseled Wall Street to be patient with the transition he has tried to achieve," said Roger Kay, president of Endpoint Technologies Associates.

Dell has had its issues recently with unstable financial performance and departures of key executives like Dave Johnson, a senior vice president of corporate strategy who was a top executive responsible for establishing Dell's long-term goals. But Kay said the company needs five more years to complete the transition and establish a stable business, and a private equity buyout right now makes sense as Dell will find investors and also retain talent to achieve those goals.

"The timing is good, the assets are valuable," Kay said. "Now is the time, I'm not surprised at all they are doing it."

Agam Shah covers PCs, tablets, servers, chips and semiconductors for IDG News Service. Follow Agam on Twitter at @agamsh. Agam's e-mail address is agam_shah@idg.com

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