What’s going on with Dell?

I must confess to being somewhat puzzled by the recent decision by Michael Dell and his investment consortium to take Dell private.  The case for is fairly straightforward – interest rates are insanely cheap, and so the “leveraged” portion of the LBO is a lot easier than it would be otherwise.  Furthermore, taking it private will allow a visionary executive and owner group to realize the long-term strategy that short-sighted Wall Street investors would….whatever, standard LBO stuff.

The case against is fairly simple as well – it’s a lot of new debt, and it’s not at all clear that Dell will have an easy time paying it back.  The deal will saddle Dell with roughly $15B in new debt on top of roughly $9B in existing debt.  So this doesn’t sound crazy for a company with $62B in revenue and $44B in assets, but if Dell was generating healthy cash flow and growing profits it wouldn’t really be in the situation it is now, would it?

More to the point, I fail to see what exactly going private will change about Dell’s current business landscape.  The PC business margins have been destroyed by cheap competition from Asia.   It’s hard to imagine Dell selling of large portions of the PC business for what it is actually listed at on the balance sheet – again, if it could do so it wouldn’t be in the position it is today.  Windows 8 will still be kind of a dud, and not an effective driver of consumer upgrades.  And Dell will still have to pay dearly for entering the enterprise software market, because it doesn’t have the ability to develop it organically.

Obviously there’s a bit of a contradiction between paying back debt and pumping free cash flow into buying your way into new markets.  I wonder what Michael Dell sees that we don’t, because it’s got to be something.


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