Can Dell Save Itself by Going Private?
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The Fiscal Times
January 15, 2013

Personal computers aren’t going the way of the buggy whip just yet, but the industry’s seemingly inevitable decline continues. Worldwide PC shipments in the fourth quarter of 2012 totaled only 90.3 million units, down 4.9 percent from year-earlier levels, Gartner Inc. reported Monday.

That, analysts at the technology research and advisory firm argue, reflects something more than just a weak economy. As consumers transition to smartphones and tablets, even the launch of the new Windows 8 operating system didn’t send consumers scurrying off to upgrade their hardware. It didn’t help that, as one Gartner analyst suggested, the most appealing Windows 8 products were in scarce supply and overpriced to boot.

In such a changing, even hostile, environment, it would be foolish of leading PC makers like Hewlett Packard (NYSE: HPQ) and Dell (NASDAQ: DELL) to sit idly by and simply watch as their market, and market share, dwindles. HP’s shipments fell year over year, even as it clung to the title of the top computer-maker in the world, with 16.2 percent of the market in the fourth quarter. Dell, once the world’s No. 1, has fallen to third behind Lenovo. Dell’s share of the market shrank to 10.2 percent from 12.2 percent a year ago. The question is what to do about it – what strategic direction to pursue? And what form of business structure is best suited to that pursuit?

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Even as the Gartner data hit the headlines, so did one possible answer. Bloomberg reported, and others confirmed, that Dell is in talks with two large buyout firms, TPG and Silver Lake. Discussions have reportedly progressed far enough for banks to have been contacted about providing the financing for what could be a deal valued at north of $20 billion – one of the biggest in history and the largest contemplated since the last buyout bubble burst in the second half of 2007.

There’s a certain allure to the idea. CEO Michael Dell, who owns 15 percent of the company’s stock, would probably love to escape the constant scrutiny of investors focused on the short term. That interest in quarter-to-quarter earnings can’t help but be a distraction at a time when the company really needs to be searching for a bigger reinvention – a way to remain relevant even as PC owners abandon their Dells in droves to jump aboard the tablet bandwagon. It will take patience for Dell to build up a presence in storage, software and services, and the market isn’t known for its patience with such uncertain turnaround plays.

The problem? It’s not at all certain that the banks would be willing to finance such a huge deal for a company facing a massive challenge to its core business. And even if they are, Dell may find he has replaced one form of tyranny for another by replacing annoyed shareholders with vigilant bondholders anxious about how much leverage a post-LBO Dell would have on its books.

Then there is Hewlett-Packard, whose woes make Dell’s challenge look downright simple. HP’s PC division is contracting rapidly and sales from its other business divisions are failing to pick up the slack. Investors have even less reason to trust Hewlett Packard’s ability to steer a path to growth, given the egg on the face of management and the board in the wake of the $8.8 billion writedown tied to the acquisition of Autonomy.

Are there still benefits in Hewlett-Packard remaining a single company? Calls for a breakup of the company are rumbling, although they aren’t as loud or as immediate as those surrounding a buyout at Dell. CEO Meg Whitman has publicly dismissed the idea; she’s not interested in presiding over a shrinking company, it seems.

That’s logical enough, but it may come down to whether the company shrinks as a whole or whether it is broken into discrete businesses – with the PC division likely to be by far the smallest compared to the company’s printing or enterprise hardware operations. It’s hard to see how a breakup wouldn’t be best for shareholders, given the fact that HP, over the years, has become almost a de facto holding company, with much of the bureaucracy and inefficiencies that implies.

In both cases, the odds are against these companies ever returning to their glory days.

Business journalist Suzanne McGee spent more than 13 years at The Wall Street Journal before turning to freelance writing. Author of the book Chasing Goldman Sachs, she has written for Barron’s, The Financial Times, and Institutional Investor.