Shares of Dell rose more than 12 percent early Monday afternoon after Bloomberg News reported that the personal computer maker was in talks with at least two private equity firms about going private.
A buyout of Dell would be worth more than $17 billion, based on its total enterprise value. The company has some $9 billion in debt, but $11 billion in cash at hand. A deal would make it the largest technology buyout since the $17.6 billion acquisition of Freescale Semiconductor by a group of buyers led by the Blackstone Group in 2006.
The Bloomberg report, citing two people with knowledge of the matter, said the talks were preliminary. It cautioned that the firms might not be able to line up financing.
The report of the talks comes a week after a top Dell executive, David Johnson, who was in charge of the company’s corporate strategy, including deals, left to join the Blackstone Group.
Any buyout would involve Michael Dell, who started the company out of his University of Texas dormitory room in 1984. The chief executive owns nearly 16 percent of the company.
At a Sanford C. Bernstein conference in June 2010, Mr. Dell was asked whether he had considered taking the private. “Yes,” was all he would say on the matter.
Since Michael Dell returned as chief executive six years ago, Dell has tried to move from its core business of personal computers and computer servers into the more stable and growing business of equipping corporate data centers with hardware and software. Its personal computer and associated laptop businesses, however, still accounts for about half of Dell’s revenue.
That PC business is shrinking fast. On Monday, Gartner, a market analysis firm, stated that for all of 2012 Dell sold 37.6. million PCs worldwide, a 12.3 percent drop from its 2011 shipments. It was the worst performance, in a weak market, of any major manufacturer. Dell’s drop was particularly severe in both the United States and in the fourth quarter, indicating that its erosion is accelerating. Hewlett Packard, the world’s top PC maker, shipped 6.7 percent fewer PCs in 2012, but was only modestly lower in the fourth quarter, and increased its share in the United States, Gartner said.
PCs, until recently the primary way people worked with computers and got on the Internet, are facing increasing competition from tablets and smartphones. The launch of Microsoft’s Windows 8 operating system in October, which PC makers hoped would revitalize their business, may have made things worse . Customers seem not to like Microsoft’s design and touch screen innovations.
Dell has been trying to cut its reliance on the PC business, but the company faces challenges.
Last July, Dell purchased Quest Software, a maker of software for data centers, for $2.4 billion. John Swainson, the head of Dell’s corporate software business, has said it will take five years to build a business big enough to significantly affect Dell’s performance.
In October Dell announced advanced products in servers, data storage, and computer networking. It faces tough competition in these areas, however, from H.P., I.B.M., and Oracle.
In the meantime, Dell’s stock has suffered. Before Monday, the stock price was down some 30 percent over the last 12 months.
The math for a leveraged buyout seems daunting, at least initially. Dell’s market value as of Friday was about $18.9 billion. Assuming a 30 percent takeover premium — slightly below the average for high technology L.B.O.’s last year, according to Thomson Reuters — that would value the company at about $24.6 billion.
Mr. Dell would presumable roll over his stake, which would still leave about $24.3 billion to cover. That means would-be buyers still have to stump anywhere from $6 billion to almost $8.5 billion in equity. That’s an enormous amount for even two private equity firms to cover, even assuming that these shops brought in co-investors to help out with the equity check.
And that leaves an investor consortium needing to raise $15.8 billion to more than $18 billion in debt. To say that’s a hefty sum is an understatement. But bankers have long argued that the debt markets can support an enormous amount of borrowing, as investors have shown a willingness to pay cheaply for high-yield debt in a world of near-zero interest rates.
One could also subtract Dell’s bulging cash horde, making the debt figure seem less onerous. However, given the company’s already significant debt load, the company is likely to remain highly levered even after an L.B.O.
For now, it appears that the company has some breathing room with ratings agencies, because with an A2 rating, Dell has a solidly investment grade assessment from Moody’s Investors Service.
The bigger question, then, is whether would-be buyers can assemble a bid in the first place. Shareholders and analysts alike were already skeptical that Best Buy could be taken private by a group of investors when the proposal was first announced last summer. And at that time, a potential buyout bid for the electronics retailer was valued at a relatively paltry $8.8 billion.
