Dell is reportedly looking to go private for a total asking price of $22 billion to $25 billion.
The company spoke with private-equity firm Silver Lake Partners about a leveraged buyout on Tuesday, The Wall Street Journal reported yesterday. Citing a "person familiar with the matter," the Journal wrote that the buyout group would include Silver Lake, Dell CEO Michael Dell, and at least one other investor, such as a pension fund or a sovereign wealth fund.
To meet an asking price of $13 to $14 a share, or $22 billion to $25 billion, Silver Lake and the other investors would need to put up $2 billion in equity. Michael Dell could use his existing stock, worth around $3.6 billion, according to the Journal. More funds could come from cash on Dell's balance sheet and new debt of around $15 billion.
Investors in an LBO raise cash for the purchase of a company mainly through debt offerings. The amount borrowed is then repaid through money earned by the business or by selling some of the company's assets.
Like other vendors, Dell has been hit hard by the downturn in PC demand. Sales and earnings have been dropping. Once worth more than $100 billion, the total value of Dell has since shrunk to around $19 billion, the Journal said.
Going private would let the company refocus itself without the pressure of keeping up quarterly profits for its public shareholders, though it would have to make its debt payments instead.
So, what is the likelihood of Dell going private?
On Monday, Bloomberg reported that Dell was speaking with two private-equity firms about going private. Citing "two people with knowledge of the matter," Bloomberg said one of the people indicated that several large banks had been contacted about financing a buyout.
In 2010, Michael Dell revealed that he had considered taking the company private.
In June 2011, the CEO nixed the idea, telling Bernstein Research analyst Toni Sacconaghi that he had no plans to take the company private.
Now, Sacconaghi thinks an LBO would be financially feasible, though he doesn't see it as likely near-term.
In an investors note released yesterday, the analyst called a Dell LBO "largely opportunistic," citing no clear restructuring opportunities or exit strategy.
"We note that Dell's PC business accounts for around 70 percent of revenues and 60 percent of profits, meaning that a spin-off/sale would result in material descaling of the enterprise business, pointing to limited restructuring opportunities," Sacconaghi said.
An LBO would also pose financial risk to the company and stifle its ability to make major acquisitions, according to the analyst. But a buyout could conceivably happen down the road under the right conditions.
"We believe an exit strategy would be predicated on waiting for a better multiple, either due to success in the enterprise transformation, or a revaluation of PC assets," Sacconaghi added.
A Dell spokesman told CNET that the company "is not commenting on speculation about a private equity bid in any fashion."
Updated at 4:30 a.m. PT on January 17 with response from Dell.