Dell soars after rumours of private equity deal

The shares of computer maker Dell, rose 13% in regular trading yesterday to close at $12.29, and then rose another 3.5% after hours to close at $12.73, after rumours the company was in talks with private equity buyers. The company’s shares were briefly suspended from trading on Nasdaq after circuit breakers were triggered as they rose over 10% after a report from Bloomberg. The company failed to respond to the rumours, saying that it doesn’t comment on speculation. The founder, Michael Dell, currently holds around 14% of the company’s shares, making him the key to the success of any plan to take the company into  private hands from its current listing on Nasdaq.

Sales of PC’s continuing to be under pressure as a result of the emergence of the new tablet sector of the market and consumers increasing reliance on mobile devices such as smart phones . Unit shipments of PC’s fell around 5% in the final quarter of 2012. As a result, Dell shares have been struggling for some time, the latest spurt in the share price values the company just shy of $21 billion.

As well as structural weakness in the PC market, Dell has also been losing shares to competitors such as Lenovo.  Dell had a 10.2% share at the end of 2012, down from 12.2% in the same period in 2011. Half of the company’s business comes from PC’s and  its global PC shipments shrank 21 per cent in the fourth quarter compared to a year earlier. The company has been trying to shift from the consumer market to corporate focused enterprise solutions in recent years, but this has been a slow and painful process.

The rationale for the private equity bid remains somewhat elusive. Firstly this would be a sizeable buy out -a full buyout of Dell would require equity of as much as $8bn and debt of as much as $15bn. In addition, If Dell is to reinvent itself as another SAP or IBM this will take time and perhaps significant investment, and private equity is notoriously short term focused to recoup its investment. 

Whether this is fanciful rumour or fact, it shows how under pressure the traditional PC manufacturers such as HP and Dell are in in the face of changing demand for laptops and personal computers. The consumer IT landscape is in a constant state of flux. Apple was the flavour of the month, now its Samsung that’s in vogue, even Nokia seems to be turning the corner. Old timer, Hewlett Packard is very much on the ropes after a series of botched acquisitions. Winding the clock forward just a few years, may mean a very different set of market leaders to what there are today. Yesterday’s tech leader, can sometimes be tomorrow’s laggard.

Contrarian investor UK