Dell's $24.4 Billion Buyout: Is This What the Fed's Ben Bernanke Wanted?
Those looking at a leveraged buyout of Dell or booming junk bond markets as a positive signal for economic growth or employment may ultimately be disappointed.
Dell's growth prospects may not improve in the hands of private investors, such as the company's founder and Silver Lake, given the constraints of leverage. Some analysis suggests a worsening of Dell's turnaround prospects in a debt-financed takeover.
"Our primary concern is that taking Dell private does not eliminate the fierce competition provided by Apple, Samsung, IBM and others. Dell will still be severely challenged by those players, particularly since it does not have much to offer in terms of smartphones and tablets," Gimmie Credit ratings analyst Dave Novosel said Jan. 16.
Record low interest rates for risky debts may not be helping struggling businesses such as Dell invest in employees, new products or plant expansion. For instance, an end-of-year bond market rush was largely used to finance special dividends to investors such as private equity firms .
"We would expect the basis for any going-private transaction would revolve around transforming the company into a smaller, higher-margin business over the next three to five years that would command a higher enterprise value multiple upon exit than it's currently being awarded in the public equity market," Fitch Ratings wrote in a late January analysis of a potential Dell takeover.
"High leverage would greatly limit the company's flexibility to address challenges in the highly competitive and evolving technology industry. Dell will continue to face formidable competitors, such as EMC, IBM, Cisco, Oracle, Accenture, HP and others, all of which will have far greater financial flexibility," Fitch said.
Notably, Dell will be hamstrung to make large acquisitions that can further its transition.
Dell ended 2012 as one of the most acquisitive tech companies of the year, buying up Quest Software for $2.4 billion . At the early part of the year, it cut a flurry of deals for IT-services specialists such as SonicWall, Wyse Technology and AppAssure Software.
Meanwhile, declining cash flow that otherwise could have been put to research and development -- for instance a push into the tablet market -- is likely to be needed to service increasing debt burdens. Fitch Ratings also notes a sub-investment-grade rating from an LBO could weaken Dell's ability to finance large customer orders, one of its remaining competitive advantages.
Dell's primary U.S. competitor in the PC-market, Hewlett-Packard, said the Tuesday deal may be an opportunity for it to gain ground on turnaround efforts.
"HP plans to take full advantage of that opportunity," the company added, according to the statement.