January 15, 2013 12:10 am

Dell shares surge amid buyout hopes

Hopes that Dell is once again considering taking itself private prompted a 13 per cent jump in the shares of the battered US technology company, bringing some relief amid the gloom that has settled over the troubled PC industry in recent weeks.

However, two people familiar with discussions that have taken place in recent weeks said that there had been at least an attempt to sound out private equity investors over a possible transaction. It was unclear whether those discussions had led to any firmer deal talks, or even whether the idea was still being pursued.

The share price bounce came despite widespread scepticism among private equity investors and investment bankers about the prospects for such a large deal in the present financial and industry climate.

With Dell valued at around $21bn, a deal would far exceed any other buyout since the 2008 financial crisis, while also displaying an unfashionable level of confidence in the PC industry at a time when most Wall Street investors have turned deeply bearish over expected continued declines caused by tablets and other mobile devices.

A report by Bloomberg that Dell has been in discussions with two unnamed private equity firms sent the company’s shares up by $1.41 to $12.29, while spreads on the company’s debt widened almost a full percentage point. Shares in Hewlett-Packard, the world’s largest PC maker, also rallied nearly 5 per cent on the report. Despite the bounce, Dell’s shares have recovered only to their level of five months ago and are still a third below their 12-month high.

Dell is going through a difficult transition as it seeks to reduce its dependence on PCs, which still account for half of its business, to become a broader business technology company. Its global PC shipments shrank 21 per cent in the fourth quarter compared to a year earlier, according to a Gartner Research report on Monday.

There has been a long-running internal debate at Dell over taking the company private. Michael Dell, its founder and largest shareholder, told an investor conference in 2010 that he had considered the strategy and Brian Gladden, chief financial officer, said later that year that the company had spent a lot of time thinking about it, but it was not likely to happen “anytime soon”.

A full buyout of Dell would require equity of as much as $8bn and debt of as much as $15bn, according to financiers not involved in any discussions with the company. The “club” deals between private equity firms that made it possible to mount massive buyouts before the financial crisis have fallen out of favour and the risks involved would make it hard to put such a deal together, several private equity investors said.

“It is volatile and on the wrong side of the technology curve,” said a senior executive at a one private equity firm.

Any attempt to finance a deal would be made easier, however, by Dell’s net cash position of more than $5bn at the end of November. With 14 per cent of the company’s stock, Mr Dell’s decision to join a buyout would also reduce the threshold for would-be investors.

David Frink, Dell spokesman, said: “Dell does not comment on rumour and speculation.”

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