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Dell Buyout Has Challenges

Feb 12 2013

English: Michael Dell speaking at Oracle OpenW...

English: Michael Dell speaking at Oracle OpenWorld, San Francisco 2010 (Photo credit: Wikipedia)

Dell Buyout Has Challenges

Michael Dell has clinched a Dell buyout deal and must turn a business losing ground in personal computers into one that will provide higher-margin cloud-computing services and tools. Dell needs to bundle highly profitable products like data storage and networking with the computer servers it currently has on the market.

Dell,47,will have greater freedom in personnel management and strategic growth without answering to shareholders. Michael Dell and the Silver Lake Management are taking the Round Rock, Texas-based company private in a buyout transaction valued at $24.4 billion with Dell regaining majority control of the company and remaining the chairman and CEO.

A Dell buyout will save an estimated %556 million in dividend payments. This can provide the funds for severance payments and restructuring costs. Dell can take steps to invest in the future and emerge stronger in software and less reliant on PCs. The expense of servicing the debt after the buyout for the next three years will be about the same or slightly lower than Dell's dividend and share repurchase costs during the past three years according to the company's filing last week with the Securities and Exchange Commission.

The downside will be a $17 billion debt and interest payments that can hinder obtaining needed acquisitions and research and development to compete with IBM, HP and Oracle. Buying upstart firms with compelling technology will be harder. Financing debt will skim an estimated $1.2 billion annually, according to Bloomberg. Possible interest rate increases and a lower credit rate could push financing costs higher.

A key individual in the company restructure after the buyout is Marius Haas, a former advisor at KKR & Co., recruited by Michael Dell in August. With Haas past connection to Hewlett-Packard under former CEO Mark Hurd, there is hope to get Dell more of the database sales from Oracle to run on Dell machines. Hurd is now Oracle's co-president and has been negotiating with Haas. Almost 60% of Oracle currently runs on Hewlett-Packard servers.

"I would love to change that percentage to Dell," Haas said. "Mark and I are very excited to work together."

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