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Dell computer

Paul Sakuma, Associated Press

Schafer: What is Michael Dell thinking?

  • Article by: LEE SCHAFER
  • Star Tribune
  • January 30, 2013 - 7:38 PM

Michael Dell appears on the verge of giving up.

Dell Inc. is reported to be moving closer to a going-private transaction led by its founder and CEO, and what Michael Dell probably thinks he is doing is just giving up the headaches of leading a publicly held company.

Who needs the pesky questions, the scripted show known as an annual meeting and all the other distractions that being public entails?

What he's really signaling is he is giving up as a CEO. He's either out of ideas for repositioning the business in the public markets or out of patience for the best ideas he's tried.

And what he's giving up is a valuable asset -- a broadly held, public company with the kind of financial strength, access to capital and market presence that most other executives could only dream about.

That's the theme sounded by many of the securities analysts who follow the company. They can agree Michael Dell could roll in his roughly 16 percent of Dell stock, get cash equity from private equity firms, his own checkbook and potentially Microsoft Corp. and borrow enough to complete a deal that could top $24 billion.

They are just not sure why he would want to.

There is no argument that Dell, based in Round Rock, Texas, has been in need of a reboot. Building personal computers is a business on a long slide, with the growth and excitement in the market moving to products like mobile devices, along with services and products to manage data in the cloud.

Dell has completed 16 acquisitions in the past three years that together generate about $5 billion in annual revenue, according to Barclays Capital analyst Ben Reitzes in a note to clients. But he noted that all these promising deals still do not generate enough revenue to offset declines in the PC business, which is still roughly half the company's revenue.

Revenue in the fiscal year that's about to end is expected by investors to be down to $56.7 billion, from more than $62 billion last year.

Going private changes the capital structure, not the market. The day after closing, Dell will still be trying to make up for declines in the PC business but with less money to fund any good ideas.

"A hefty debt burden in conjunction with a leveraged transaction could hamper financial flexibility to pursue more acquisitions and stifle the company's ongoing transformation," wrote Raymond James & Associate analyst Brian Alexander in a note to investors. "We note that Dell recently outlined its desire to build a $2 billion software business and is less than halfway to its goal. Realizing this objective is likely to require $2 billion [to] $3 billion in liquidity."

Dell has not commented on the matter, but this isn't the first time the subject has arisen. In June 2010 Michael Dell was asked by an analyst if he had considered taking Dell private, and his one-word response -- "Yes" -- kicked off a round of speculation in Dell stock.

It seems safe to conclude that Michael Dell isn't having any fun being scrutinized in the public market as the company is trying to remake itself. The stock trades at a single-digit multiple of estimated earnings per share, the kind of valuation that would discourage utility company executives.

At its price before the latest going-private discussions popped up in the news -- just under $11 per share -- Dell shares traded at less than half of the price they did in January 2007. That was when Michael Dell took over again as CEO.

But Dell could remain a viable public company. As analysts suggest, it could invest in acquisitions at a more aggressive pace.

It could allocate a chunk of its cash, more than $11 billion as of the most recent quarter's end, to repurchase stock. And if building personal computers is a shrinking commodity business, Dell could exit.

A viable public company isn't the only one that can steadily increase earnings or dividends, or both. It's one managed for the shareholders and takes advantage of access to the capital markets and market visibility that come with being public.

Mark Henneman of Mairs and Power Inc., of St. Paul, said this week that he can't think of any stocks he'd want to own in companies that were not growing for extended periods. But there are companies that took cash flow from a declining business and transformed themselves while staying in the public arena.

"What about Deluxe?" Henneman said, referring to the Shoreview-based company that just reported its best annual revenue growth rate since 1994. "Check printing is declining, yet they have found some interesting ways to allocate capital to new businesses.

"In my mind, that has earned its right to be a public company."

lee.schafer@startribune.com 612-673-4302

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