Why Private Equity’s Right for Dell

by alexoscarew | February 25, 2013 at 12:10 am

68 views | 0 Recommendations | add comment

Michael Dell is no fool. After watching the declining demand for personal computers (PCs) and its disastrous impact on the PC makers, Mr. Dell had an idea: sell the company to private equity and let them try to convert Dell Inc. (NASDAQ/DELL) into a “mini IBM.”

The new Dell will be focused on serving the technology needs of large companies, which may include the possible divestiture of its struggling PC business. (Source: Gupta, P. and Damouni, N., “Dell to go private in landmark $24.4 billion deal,” Reuters, February 5, 2013.) A decade ago, International Business Machines Corporation (NYSE/IBM) followed a similar strategy after selling off its PC business to Lenovo Group Limited; so far, the move has been successful for IBM, according to my stock analysis.

The recent operating results from Dell suggest that its founder, Michael Dell, did the right thing. In the fiscal fourth-quarter earnings season, the company earned $0.30 per diluted share, down 31% year-over-year. Yet the red flag at Dell was an 11% decline in revenues. While the results narrowly beat the Thomson Financial consensus estimates, it’s clear that the PC business is dying, according to my stock analysis.