Investment Contrarians

Why Private Equity’s Right for Dell

By for Investment Contrarians |

Private Equity’s Right for DellMichael Dell is no fool. After watching the declining demand for personal computers (PCs) and its disastrous impact on the PC makers, Mr. Dell had an idea: sell the company to private equity and let them try to convert Dell Inc. (NASDAQ/DELL) into a “mini IBM.”

The new Dell will be focused on serving the technology needs of large companies, which may include the possible divestiture of its struggling PC business. (Source: Gupta, P. and Damouni, N., “Dell to go private in landmark $24.4 billion deal,” Reuters, February 5, 2013.) A decade ago, International Business Machines Corporation (NYSE/IBM) followed a similar strategy after selling off its PC business to Lenovo Group Limited; so far, the move has been successful for IBM, according to my stock analysis.

The recent operating results from Dell suggest that its founder, Michael Dell, did the right thing. In the fiscal fourth-quarter earnings season, the company earned $0.30 per diluted share, down 31% year-over-year. Yet the red flag at Dell was an 11% decline in revenues. While the results narrowly beat the Thomson Financial consensus estimates, it’s clear that the PC business is dying, according to my stock analysis.

While the $24.0-billion deal is facing opposition from two major shareholders, Southeastern Asset Management and T. Rowe Price, that are both demanding more money, I really cannot see how this will happen. The results point to a company on the decline unless something is done; based on my stock analysis, there’s more of a chance of survival with private equity for Dell.

The strategy shift that is expected to take place is not a surprise, given the declining PC business, as indicated by my stock analysis. Dell produced tablets, hybrid laptops/tablets, and other mobile devices to try to compete; but at the end of the day, Dell failed to keep up with the likes of Apple Inc (NASDAQ/AAPL), Samsung Electronics Co. Ltd., and the many other device makers, according to my stock analysis. My advice is to buy the makers of mobile hardware and software, especially the producers of tablets and smartphones.

Hewlett-Packard Company (NYSE/HPQ), under CEO Margaret Whitman, is also trying to keep its sinking ship afloat. But with crippling declines in the demand for PCs and intense competition in printers and other products, it has not been easy, as my stock analysis suggests. However, unlike Dell, Hewlett-Packard (HP) continues to sell PCs, while also streamlining its product line in an attempt to produce a leaner and more efficient technology company. HP also has a dedicated group responsible for growing the mobile business, albeit, it may be too late, according to my stock analysis. The stock price has reacted, surging higher on the optimism to the current $17.00 level from its low below $12.00.

My stock analysis indicates that the PC market is dead, and HP will need to re-invent itself. Dell finally gets it, and now the company must work hard to try to catch up to IBM in the enterprise area.

Former Wall Street star Microsoft Corporation (NASDAQ/MSFT) is also another old tech company that is trying to revitalize its business via new mobile technologies; recently it entered into the hardware business with its “Surface” tablet.

My stock analysis indicates that as we move forward, I expect there will be more major changes for old tech stars HP and Microsoft, and chipmakers Intel Corporation (NASDAQ/INTC) and Advanced Micro Devices, Inc. (NYSE/AMD), as these companies try to re-invent themselves and adapt to the ever-changing technology climate. For the time being, I would avoid companies that base a large portion of their sales on PCs.

But one thing is for sure: Michael Dell did the right thing.

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