Lex: Dell

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Dell could not have chosen a better moment to signal its self-confidence. Thursday’s announcement that it is seeking authorisation to buy back $10bn worth of stock comes on the heels of disarray at Hewlett-Packard, which last month ditched its chief executive.

Financially, this is a nice though hardly momentous move for investors. The net share count will probably fall by less than the 250m Dell shares that $10bn buys these days, since the PC maker’s stock option awards remain pretty generous. Even if there were no offsetting dilution from stock options, the earnings per share enhancement from the buy-back would still be well under 10 per cent for Dell’s 2006 financial year.

More significantly, perhaps, is that this large buy-back is no admission that the PC giant has run out of road as can sometimes be the case with duller companies. On the contrary, Dell is aggressively moving into HP’s printer territory while also investing internationally and expanding its service offering.

Furthermore, a buy-back would come on top of some good operational news. The turmoil at HP and, to a lesser extent, IBM’s PC sale to Lenovo, are helpful to Dell since such events create uncertainty among corporate buyers. If some are driven into Dell’s arms, it would be icing on the cake; the market is already suggesting sustained strong corporate demand. True, Dell’s consumer business is not growing particularly strongly, but it is also lower margin. It all adds up to a sweet start to Dell’s year.

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