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Walt Laws-MacDonald | Show Me The Money!

Dude, you’re getting an LBO

Published: Wednesday, February 20, 2013

Updated: Wednesday, February 20, 2013 01:02

P ersonal computer maker Dell announced a few weeks ago that founder and CEO, Michael Dell, would take the company private in a leveraged buyout. Though any deal of this nature usually catches the market by surprise, this one is a sign of the times.

 The PC industry is dying. Ten years ago, Windows computers ruled the market, and nearly every home had a PC. I remember my family fighting to use a machine that was painstakingly slow by today’s standards. You know the one — the big tower PC with the 13-inch monitor that weighed more than a third grader. You needed that computer to play the Sims, or check your MySpace, or go on AIM — remember AIM?

 Why am I bringing up so much nostalgia? Personal computing has changed, and with it so has the computer market. When was the last time you played the Sims? When was the last time you signed into instant messenger? Gaming has shifted to dedicated gaming consoles with the popularity of PlayStations and Xboxes. The majority of Americans now check their email and social networks and communicate using their smartphones or tablets, leaving little room for home computers.

 Even for people who still use personal computers frequently, Apple’s market share has drastically increased. MacBooks are now just as, if not more, common as ThinkPads among students, and in some settings iPads have completely replaced computers.

 Many PC manufacturers have folded in recent years. IBM’s hardware division, which made the ubiquitous ThinkPad — you know, the one with the red dot in the keyboard — was spun off and sold, while other giants like HP — which bought Compaq in 2001 — have seen lower profits, unable to adapt to a business that emphasizes the “wow” factor over brute computing power.

 PCs maintain a foothold in business computing, but that cannot support the entire industry of manufacturers. Dell has struggled in past years, missing earnings-per-share estimates in the last quarter and failing to introduce any new products in recent memory.

 Enter the leveraged buyout, or LBO. Firms use LBOs to take over weak companies, in the hopes that they will be able to turn the business around without the shareholders; by financing part of the deal with existing or new debt, the firm is able to “leverage” that capital and reduce the out-of-pocked cost of the deal. Essentially, the firm uses the company’s existing assets as collateral to secure the debt, allowing it to pay the full price of the deal now and pay back the lenders after it has turned a profit.

 Michael Dell has tendered an offer for the company at a price of $13.65 a share, a 25 percent premium to where the stock had been trading. As CEO, Dell — the man — can more easily buy Dell — the company — than an outside investor. He already owns more than 15 percent of the stock, and can use some — or all — of Dell’s existing cash to finance the deal.

 Microsoft, maker of the Windows software platform, has also agreed to finance up to $2 billion in additional debt. Taking part in the deal is a smart move for Microsoft. Letting Dell collapse would mean losing another chunk of an already shrinking market for Windows computers. Rather than simply investing, financing the debt allows Microsoft to help without “playing favorites” among PC makers.

 Though I think PCs will never develop the single software-hardware fusion that Apple has, there is certainly consolidation in the industry. The PC is not dead, but, just like your old Sims family, it doesn’t receive nearly as much attention as it used to.

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