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Dell buyout highlights troubles of the PC business

Dell buyout highlights troubles of the PC business

By Agence France-Presse | Updated: 6 February 2013 14:45 IST

Dell's plan to take the computer giant private offers an opportunity to return to its start-up roots, but won't solve the fundamental problems facing the company and the PC sector, analysts say.

The Texas-based tech giant on Tuesday unveiled a $24.4 billion buyout deal giving founder Michael Dell a chance to reshape the former number one PC maker away from the spotlight of Wall Street.

Roger Kay, analyst at Endpoint Technologies, said Dell's plan underscores the deep problems of an industry roiled by a rapid shift to mobile devices like tablets and smartphones, and away from traditional PCs.

"It's an illustration of how tough the PC business is, that Dell had to take this extreme step," Kay said.

Kay said that without the pressure of meeting quarterly financial targets, Dell can focus on more profitable PC segments as it tries to reinvent itself as a services and software company.

"Michael has been trying to turn Dell into a supplier of enterprise solutions for a long time," said Kay. "He has pleaded with Wall Street to give him time."

Kay told AFP that going private would make a transition easier by avoiding the spotlight of "ugly results" which could come from scaling back the PC business.

"The commodity PC business has been suffering," Kay said.

"Dell may probably keep the higher margin consumer lines but maybe look at rest of the portfolio."

Shaw Wu, analyst with Sterne Agee, said Dell has a difficult task ahead.

"Despite the company's strong efforts to transform itself... we estimate that about 70 percent of its business is tied to PCs," Wu said in a note to clients.

"On the positive, we believe going private takes the company out of the quarter-to-quarter grind of being a publicly traded company. But on the negative, not having publicly traded stock could make it more difficult to make larger, transformative acquisitions."

Wu said that as a private firm, Dell's cash would be needed to pay equity investors and service debt, noting: "We are not sure going private improves the company's fundamental position."

Darren Hayes, a Pace University computer science professor and former investment banker, said that by going private, "you're not subject to a lot of regulation, you don't have to answer to your shareholders, so maybe you can be more nimble in strategy."

He noted that "Dell has struggled because of Apple and Lenovo, so this might be a way to trim costs and regain some ground."

The computer maker, which Dell started in his college dormitory room, once had a market capitalization of $100 billion as the world's biggest PC producer.

Dell is now the number three global PC maker, behind Hewlett-Packard and Lenovo, according to the latest report from market tracker IDC, showing Dell's market share of 10.6 percent in the fourth quarter.

HP said in a statement that Dell "has a very tough road ahead" and "an extended period of uncertainty and transition that will not be good for its customers," adding that HP "plans to take full advantage of that opportunity."

Chinese maker Lenovo said it would not comment on a competitor but maintained that "we remain as always confident in our strategy, our ability to deliver compelling and innovative products and our overall position and performance."

Rob Enderle, a tech analyst and consultant, said however that the deal suggests "tighter coupling of Dell and Microsoft," which is providing a $2 billion loan toward the buyout.

"Surface was created because Microsoft didn't think the (PC makers) were listening. Dell will now be listening and Microsoft is likely to listen to Dell better as well," Enderle said.

"But the goal is to put Dell back in start-up mode... Both will target Apple and Google as a team which is where their combined power is likely to be made visible."

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