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Friends with money: Dell's big bet on private finance

Memo to Michael: Don't be like HP

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Analysis If not a gambler, Michael Dell seems certainly a born showman. With his 50th birthday on the horizon, when most people his age and with his billions might be thinking of slowing down or going philanthropic, he and his PC company have begun a brand new phase.

Dell, a native of the brassy US state that lends its name to a brand of poker, has gone all in on his company's future, hitting up private investors for $24.4bn to take back control of his company - the world's third largest maker of PCs - by buying out investors.

It's another bold move for Michael Dell, who started the PC company in his University of Texas dorm room; became the youngest CEO on the Fortune 500 in 1992; stepped down in 2004; and then took back back the CEO's post in 2007 to save Dell from drowning in its own direct PC business.

Today, however, Dell's doing more than simply launching or expanding his company: he's re-inventing it using a plan that should - at the least - overhaul the signature Dell PC business that helped him make his billions or - at the most - see a complete sell-off of that PC business.

After years of expansion into servers, networks, software and services, it's PCs that remain Dell's single biggest concern and that's a problem because PC sales and profits are falling - right in line with falling results across the entire PC sector. And that's all thanks to tablets and smartphones.

Job number-one for Dell is to stop the company that bears his name from being dragged to the same graveyard - whether by an unwanted product line or by a structure and culture incapable of change, as was eventual cause of death of the legendary Sun Microsystems.

Will Dell succeed? That's the gamble. The competition has already - publicly - cast its judgment.

Hewlett-Packard, which knocked Dell out of its top slot as world's largest PC maker some years back, is already crowing over what it sees as the lead-up to the demise of its arch competitor. HP reckons Dell's made a big mistake in bringing in billions of dollars of loans from private equity, because that money has to get paid back from somewhere - and HP reckons it knows from where: product development.

"Leveraged buyouts tend to leave existing customers and innovation at the curb. We believe Dell's customers will now be eager to explore alternatives, and HP plans to take full advantage of that opportunity," HP said.

Risk and reward

Yes, the decision to bring in private capital and load the company up on debt is a risk, and it's all so very 2007. We all know the stories of the equity boys who load companies up to the gills with debt before trying to flip them to cheap buyers to make a return. Going private is a calculated gamble for Dell, but it does have a payoff.

By coming off the stock market, management is freed up to make changes removed from the advice, influence and opinions of investors and the markets - places concerned by quarterly profits.

Dell will also be free to enact changes that won't yield short-term returns and that could also be regarded as wrong by a Wall St that has its own set of priorities. Dell can do almost anything from developing new products to swinging the layoffs axe. And while the latter is guaranteed to hurt a company's stock, the former is is not actually guaranteed to help, as Microsoft's found on Windows 8.

For an object lesson in how staying public hurts, look at HP.

HP, like Dell, is also going through major challenges and changes as sales of PCs fall to some kind of new normal - a normal where PCs must co-exist with tablets and smartphones as form-factors for mass computing. But HP is playing out its changes in public - at great cost to its stock price and to its everlasting embarrassment.

Back in 2011, when HP's former CEO, Leo Apotheker, revealed his business transformation plan involved selling the PC business and buying UK search company Autonomy, HP's stock tanked from $32.32 to $23.60. A U-turn followed, and the board recanted on the PC sale, but buying Autonomy a decision that's turned into an open wound, while Apotheker was dumped for Meg Whitman.

What should we expect to happen to Dell behind the private veil?

Sale of the PC business, or a massive restructuring, is certain. Interestingly, Dell decided to go private in August 2012 on the heels of a second-quarter bashing that saw falling revenue and profits - down 8 and 18 per cent respectively.

When private equity steps aboard, it wants a return and a return is best achieved through growth, sale or an IPO - and it's the last option that often represents the best return.

Dell's investors will want to ensure the highest value for a Dell IPO - the kind of value attached to the stock, capitalisation and "enterprise value" of the likes of Apple and Google, not the value associated with being a lowly PC maker, which is vulnerable to the recent incursion of tablets. Dell's stock price has dropped 40 per cent in five years, from around $40 per share in 2008 to about $15 today.

Dell has plenty in reserve for investors should they want a better valued company. The company has expanded into services, software, cloud, networking and printers - but with varying degrees of success. Look at that portfolio today and what you witness is uninspiring and unexciting.

Take software. Dell's looking more like an IBM, Computer Associates or Hewlett-Packard - with end-point, applications and systems management - rather than a Salesforce or an Amazon. Tellingly, the head of Dell's software business is an ex-CA man. On the hardware side, meanwhile, Dell has a successful server business running the data centres of web-scale operators like Microsoft's Bing.

Going private would give Dell the opportunity to offload and reboot, to reorganise and present a new operation free from the negative connotations of the PC present.

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