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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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Another DoubleClick?

If you doubt the power of private equity to reinvent a company that's looking for somewhere to go next, then look at DoubleClick - a once relatively unknown internet advertiser and data management business.

DoubleClick was a private operation bought by Hellman & Friedman for $1.1bn in April 2005. Hellman & Friedman sold DoubleClick's Abacus data management business to Alliance Data Systems for $435m a year later before unloading DoubleClick's ads biz on Google for $3.1bn. The Abacus sale was vital because, with Abacus, DoubleClick was thought confusing to customers - something that helped DoubleClick's competitors.

Dell might be saddled with a falling PC business but it still has possibilities for its new investors. And, fortunately for Michael Dell, the business is cash-flow positive, meaning it already as the money engines in place to generate payback. They just need tuning.

The Register spoke to Alex Noton, founder and managing director of Hampton Court Capital. The MD, who has more than 15 years matching Silicon Valley companies to investment, told us Dell's investors will have seen Dell's possibilities. "They [private equity] don't buy failing companies - it doesn't make sense. They buy companies that are strong and have good growth prospects but may need restructuring so [the VCs] could help in reshaping the business," Noton said.

So what comes next?

In the short term, the deal must be closed - that's scheduled for August, at the end of Dell's Q2. We're now in a 45-day period when Dell must solicit and entertain competing offers. Theoretically, anybody can step in and must be entertained but the likelihood of this happening is small. The Lenovos and Samsungs are doing well enough without absorbing Dell. It might take somebody like an Oracle - the database giant that bought Sun in 2010 - to make another unexpected, entirely left-field opportunistic bid. In the case of Sun, Oracle's CEO Larry Ellison coveted Sun's systems business to put his database on high-performance Unix boxes.

It's almost certain that ambassadors for Dell had already reached out for such deals before the decision to go private, and came back with nothing.

Once there is an agreement, it'll be over to shareholders who must approve a deal - a deal that would, likely come with the recommendation of the board. The Silver Lake deal will give stockholders $13.65 for each share, a 25 per cent premium based on Dell's closing price of $10.88 a share on 11 January 2013.

At this stage it's unknown whether shareholders will approve or hold out. Certainly, one name stands out: Southeastern Asset Management, the largest outside holders of Dell stock. Southeastern has a history of shareholder activism - it was the company that finally gave up on years of losses at Sun and pushed the systems giant into acquisition by Oracle to "realise the true economic value of the company."

In addition to getting shareholder approval, Dell must also get the nod from regulators before it can stop being traded as a public company and return to private hands.

If approved, the day-to-day running of Dell will likely go unchanged as Michael Dell remains in position. Noton tells us equity types like to keep company founders and senior management in place rather than replace them. VCs are not, after all, experts in running the business and will want to ensure the engine they've inherited doesn't stop bringing in the cash.

There are exceptions. Kevin Ryan was DoubleClick CEO for nine years, taking it from 20 people to 1,500, but he stepped aside when Hellman & Friedman stepped in.

Noton explains the types likely to get involved with Dell. "They are finance guys but you get very sophisticated operationally focused private equity firms that deliver more than financial capital, so [they] will be involved in strategy for the business and input in helping the company build relationships and bring onboard other management teams," he told The Reg.

What will $2bn buy Microsoft?

There is a wild card: Microsoft, since the world's largest software company is taking a $2bn stake in Dell. For its loan, Microsoft will want a say in what Dell does next and this is likely to mean trying to exert its influence to ensure Dell continues stamping out PCs running Windows, particularly tablets running Windows 8. PC makers completely ignored its advice before Christmas on how they should build Windows 8 tablets, and it might want another shot with Dell.

In a statement on its investment, Microsoft told The Reg that it is committed to the long term success of the "entire PC ecosystem and invests heavily in a variety of ways to build that ecosystem for the future".

A spokesperson added: "We will continue to look for opportunities to support partners who are committed to innovating and driving business for their devices and services built on the Microsoft platform."

If Dell is serious about a reboot then it should resist listening too much to Redmond. The PC market is viable - otherwise private equity wouldn't have stepped in, as it needs the cash from the engine to help recover the debt. What's unknown is: viable at what level of sales, as we haven't hit bottom yet.

Meanwhile, Microsoft's advice on what sells has proved flawed: Microsoft encouraged PC makers to make tablets that maximised touch in Windows 8 but PC makers tell us this would have meant producing high-end Ultrabooks that would not have sold. That's because customers who aren't buying Apple are buying devices running Google's Android instead - not Windows. Android devices, unlike those running Windows 8, are selling in vast numbers. This is because Android, unlike Windows, doesn't come with a per-device or volume licence charge that eats into its margins. Android is also starting to appear on laptops from Dell's rivals.

Perhaps the best Microsoft will do is secure a stake for Windows at Dell alongside Android. Or, get the inside track on the sale of Dell's PC biz ahead of competitors to stamp out more Windows 8 PCs and tablets.

Ultimately, there's no guarantee Dell's bet will pay off. Leveraged buyouts don't always work: telecoms company Avaya was bought by Silver Lake in 2007 for $8.2bn - growth had slowed and Avaya was saddled with a legacy phone business. Under Silver Lake, Avaya bought Nortel's Enterprise Voice and Data business and filed for a $1bn IPO in 2011, but its revenue has fallen and its chief financial officer has gone, meaning the IPO hasn't materialised. A successful business, but not successful enough for its masters, it seems.

And by bringing in equity, Dell risks slowly succumbing to the agenda and goals of a different set of moneymen, this time without shareholders or the existence of a public and regulated environment to constrain them.

But Private equity does enable Michael Dell to retreat from the market and keep his cards close to his chest for a reboot that takes his company in a new direction. Dell won't disappear in private hands but it will change. The question is to what degree and if that's enough for all concerned. ®

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