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Dell buyout stalled by Microsoft, low takeover price?

Time to sell the PC business to Lenovo and cut out all the middlemen

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The word making its way around Wall Street is that Michael Dell's plan to take the company that bears his name private through a leveraged buyout has stalled because of the competing interests of private equity firm Silver Lake, which is ponying up a big piece of the cash to do the deal, and current Dell shareholders who want more money.

The chatter over at the Wall Street Journal is that the buyout deal is still on track and could be announced in a matter of days. But, of course, that was the rumor that was going around when word the Michael Dell wanted to have another look-see at going private broke two weeks ago.

Since then, a lynch mob of bankers have lined up to loan Silver Lake the funds to do the deal, and Microsoft has entered the picture, allegedly offering up to $2bn in cash to Dell to buy back shares and get off the NASDAQ.

According to the WSJ report, Microsoft is not just thinking about giving Dell, the man, money to get off Wall Street, as if they were buddies, but that Redmond wants to have some say in how private Dell, the company, will be run once the deal is done.

How much say you get after putting $2bn into a buyout for a company with a market capitalization of $22.65bn is unclear, but it should not be all that much, mathematically speaking. And that also goes for Silver Lake Partners, the private-equity partner that is looking to put in some of its cash to help the deal get done. Various banks are rumored to have collectively come up with $15bn to cover the share repurchases to take Dell private, and Michael Dell can roll his 15.7 per cent stake and some of his own private billions into the deal, as well.

One other problem is that the price of the deal has to keep going up as Dell's shares rise. The plan was for a deal that would come in at around $13 per share, but now talk has turned on a $15–per share price that Silver Lake has gotten behind, if you believe the chatter cited today in Barron's, the stock-flogging sister rag of the WSJ.

The more people talk about this deal and the more they realize how undervalued Dell's shares are, the more expensive this buyout is going to get.

As the markets closed on Tuesday, Dell's shares were trading at $13.26, and that probably means that $15 a share is not going to cut it. There is apparently some talk of $20 a share, which seems a bit of a stretch considering that Dell's five-year high back in July 2008 was $24.57.

Somewhere around $15 per share is where Dell shares have been average for the past three-and-a-half years, and with Dell's profits down and the company so heavily dependent on PCs, it is tough to make the case that Dell's prospects outside of the data center, where it has rallied in recent quarters, is very good.

Maybe Microsoft should just pay Dell $2bn to stay in the PC business and get Wall Street off its back?

It's hard to believe that private equity firms are any kinder or gentler than Wall Street. Silver Lake and its banking friends may give Dell, the company, some peace and quiet for a few years, but they will want a decent return on their investment over, say, a five-year horizon.

Maybe Dell should just sell its PC business to Lenovo for a few billion bucks like IBM did a while back, and just focus on the data center. ®

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