Dell Shares Rise on News Company May Go Private

January 14, 2013 Public investors are excited about the prospect of Dell going private.

Shares of Dell spiked nearly 13 percent on Monday after Bloomberg News reported that the beleaguered personal computer was in talks with at least two private equity firms over a potential buyout.

While a buyout would not solve any of Dell’s problems, it would enable the company to take radical measures without the harsh glare of shareholders.

But a takeover would be a daunting task for would-be buyers. A leveraged buyout could be worth more than $20 billion, with the company already bearing $9 billion in debt. At that level, it would be the biggest technology buyout since the $17.6 billion acquisition of Freescale Semiconductor by a consortium led by the Blackstone Group in 2006.

A spokesman for Dell declined to comment.

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.

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 company private. “Yes,” was all he would say.

Since Mr. 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 account for about half of Dell’s revenue.

That PC business is shrinking fast. On Monday, Gartner, a market analysis firm, said that Dell sold 37.6 million PCs worldwide in 2012, a 12.3 percent drop from the previous year’s shipments.

PCs are facing increasing competition from tablets and smartphones. The introduction of Microsoft’s Windows 8 operating system in October, which computer makers hoped would revitalize their business, may have made things worse. Customers do not seem to like Microsoft’s design and touch screen innovations.

Dell has been trying to cut its reliance on the PC business, but those efforts face their own challenges.

Last July, Dell purchased Quest Software, a maker of software for data centers, for $2.4 billion. John A. 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 Hewlett-Packard, I.B.M. and Oracle.

In the meantime, Dell’s stock has suffered. Before Monday, the stock price was down about 30 percent over the last 12 months.

Though the stock has sunk, Dell would still be hard for a private equity firm to digest, with a potential price above $20 billion.

While Mr. Dell would presumably roll over his stake, buyers would then have to come up with more than $6 billion in equity. That’s an enormous amount for even two private equity firms to cover, assuming that these shops brought in other investors to help out with the equity check.

Moreover, the buyers may need to raise around $16 billion in debt financing. Deal makers have argued, however, that companies are able to borrow cheaply thanks to high demand in the debt markets.

Dell also has a sizable war chest, with $11.3 billion in cash and short-term investments as of Nov. 2, which could make the debt bill less onerous.

But the company said in a regulatory filing in March that much of that cash was held overseas, meaning that it would incur a big tax penalty if it brought cash back home.

The bigger question, then, is whether would-be buyers can assemble a bid in the first place.