Dell rolling the dice by taking itself private

For Dell, a $24.4 billion deal to take itself private is a bold move out of Wall Street's spotlight as it tries to remake itself in a world where personal computers are no longer the big business in technology.

Yet the buyout – which was announced Tuesday and would be the biggest by far since the days of the recession – is a huge gamble. It will saddle Dell with $15 billion of new debt, and it does nothing to divert the forces reshaping the technology industry and undercutting the company's business.

Fifteen years ago, Dell made enormous profits selling customized PCs directly to customers. Six years ago, it was the world's leading maker of personal computers. Today, it is in third place, behind Hewlett-Packard and Lenovo.

Dell's share of an already contracting market for PCs slipped to 10.7 percent last year, from 16.6 percent six years earlier. No-name rivals from Taiwan and China grind earnings to razor-thin margins. Android smartphones and iPads, not Windows laptops and desktops, are the best-selling and moneymaking devices.

And while a shift to cloud computing has increased demand for data centers – an opportunity for Dell to sell servers – big customers like Google and Facebook build their own equipment cheaply. The rise of cloud services has also prompted many companies to forgo buying additional machines, instead relying on rented time and applications running on faraway computer networks.

Dell's share of the market for servers slipped about one percentage point, to 22.2 percent of 9.5 million servers sold in 2011. The greater problem in this segment is the pressure on profit margins. Shaw Wu, an analyst with Sterne Agee, estimates operating margins on servers, once about 15 percent, are now "in the high single digits, compared with the mid-single digits for PCs." It is likely that servers will soon have PC-like margins, he said.

Michael S. Dell is betting his stake in the company and some $700 million of his fortune that he can meet those challenges and turn around a business he started in 1984 in his dormitory room at the University of Texas.

"Dell's transformation is well under way, but we recognize it will still take more time, investment and patience," Dell wrote in a memo to employees Tuesday. "I believe that we are better served with partners who will provide long-term support to help Dell innovate and accelerate the company's transformation strategy."

Dell's investment means he will maintain control of the company if its shareholders approve the deal. Private equity firm Silver Lake, one of the most prominent investors in technology companies, is contributing about $1 billion in cash.

And Microsoft, seeking to shore up one of its most important business partners, has agreed to lend Dell $2 billion. Microsoft itself is under pressure, with longtime suppliers flirting with rivals to its Windows operating system.

"Microsoft is committed to the long-term success of the entire PC ecosystem and invests heavily in a variety of ways to build that ecosystem for the future," the software giant said in a statement.

Despite taking on an additional $15 billion in debt, Dell and Silver Lake argue that the company will survive, thanks to the cash that the PC business still generates.

The size of the transaction evoked the frothy deal-making days before the financial crisis. Dell would be the biggest buyout since the Blackstone Group's $26 billion takeover of Hilton Hotels in 2007. Yet few expect a resurgence in giant leveraged buyouts. While the continued availability of cheap financing makes such deals possible, financiers caution that Dell represents a special case because of the founder's big equity stake.

The deal is the biggest test yet for Dell, 47, who has a fortune estimated at $16 billion. After a three-year absence, he returned as chief executive of the company in 2007, vowing to restore his creation. His strategy has focused on moving into the business of data centers and corporate software services, marked by numerous acquisitions that have cost billions of dollars.

So far, that has yielded little. Dell's shares have fallen 31 percent over the past five years, closing Tuesday at $13.42 – below the buyout's offer price of $13.65.

But that strategy will largely remain in place if the management buyout is completed. The company will cut its PC offerings further and buy more companies involved in corporate computing for small and medium-size businesses, said Brian T. Gladden, Dell's chief financial officer.

Although Dell has bemoaned his company's dismal stock performance for years, his plan to take it private began in earnest only last year.

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