Dell Considers Going Private

In the three-and-a-half years since he resumed running Dell (DELL), the computer maker he founded 26 years ago, Michael S. Dell has made more than 10 acquisitions, cut some 10,000 jobs, and hired executives from Motorola (MOT) and Nike (NKE) to put a little flash in the company's products. Dell bought Perot Systems for $3.6 billion last year to expand into computing services.

None of that has worked very well. The company's stock has fallen 42 percent since Jan. 30, 2007, the day before Dell returned from semi-retirement. Over that period, Hewlett-Packard's (HPQ) stock has gained 11 percent, and IBM's (IBM) is up 31 percent.

Slumps happen. There's less precedent for Dell's statement before an audience of investors and analysts on June 3 in New York. An analyst asked him if he'd ever thought about taking the company private: "Yes," he answered. There was silence in the room, and Dell declined to answer any more questions on the matter.

"When companies talk about going dark, typically you think about small companies with problems," says Jarrad S. Zalkin, a vice-president at investment bank TM Capital. "You don't think about a company like Dell." Company spokesman Jess Blackburn declined to talk about Dell's statement. Michael Dell also declined to comment.

Dell, 45, founded the company out of his University of Texas dorm room and built it into a model of manufacturing efficiency. Executives from other companies would visit its Round Rock (Tex.) headquarters to see how he did it. A lot has changed since then. The industry's focus has shifted toward mobile computing, software, and technology services. IBM and HP have made big commitments to software and consulting, a much higher-margin business than building and selling personal computers. Dell still gets 24 percent of its revenue from desktop PCs. Even after the Perot Systems acquisition, services account for only 13 percent of its sales. Cisco Systems (CSCO) is angling for a piece of Dell's $6 billion server business. While Dell introduced a tablet computer called Streak in May, it didn't steal much thunder from Apple (AAPL). "This transformation is incomplete," Dell said at the June 3 investor conference.

Some analysts say Dell needs a deal on the scale of HP's $13.2 billion acquisition of Electronic Data Systems in 2008. Shaw Wu, an analyst with Kaufman Bros, says one promising match might be Silicon Valley's Juniper Networks (JNPR), which makes routers used by phone carriers and cable companies. The market for such networking equipment is $7.1 billion. "They need to do something dramatic, something crazy," Wu says. The problem with pursuing acquisitions is that money is becoming tight for Dell. Sales fell 13.4 percent, to $52.9 billion, in Dell's 2010 fiscal year ended Jan. 29. On June 10, Dell set aside $100 million of its first-quarter profit for a potential settlement with the Securities & Exchange Commission over the computer maker's relationship with Intel. (Both companies declined to give more information on what the SEC is investigating.)

Going private and escaping investor scrutiny might give Dell the time and flexibility to develop its service business so it could better compete with IBM and HP, says Zalkin of TM Capital. "You can move much more boldly as a private company," he says.

Still, taking the computer manufacturer private would be expensive. Dell had a $27 billion market value at press time, and technology companies typically fetch a 25 percent premium when they're sold, says Zalkin. Other analysts and bankers question whether going private would solve any of Dell's bigger problems. It "really doesn't change anything, because the fundamental disadvantages don't go away," says Kaufman's Wu. "The competitors are still there."

The bottom line: Founder Michael Dell says he has considered taking his company private, a dramatic attempt to reverse fortunes at the company.

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