Shares of Dell Inc. leaped on Monday after an analyst at Goldman Sachs upgraded the stock - and mused about the (distant!) possibility of a leveraged buyout in the computer maker's future.
As of midmorning on Monday, Dell was trading at $10.30, up nearly 7 percent and reaching levels unseen since September. That provides some solace to shareholders in the company, which has struggled to redefine itself as more than a maker of personal computers at a time when profit margins have shrunken to razor-thin levels.
In his note, Goldman's Bill Shope writes that the sell-off in Dell shares is likely over-exaggerated at this point. Pessimism about the fate of PC makers, whose products are far less profitable now amid a glut of supply, has gone too far. And expectations for Dell in particular have reached what he calls their nadir.
But it is Mr. Shope's discussion about a possible L.B.O. that may have excited investors. He points out that Dell has a sizable amount of cash on its balance sheet, totaling $11 billion as of Nov. 2. That cash could be enormously useful in a take-private transaction, helping to pay down the debt that would surely be accumulated.
And the company's eponymous founder and chief executive, Michael Dell, owns a 14 percent stake.
However, Mr. Shope does note that taking Dell private would be an enormous undertaking. At Monday morning's stock price, the company is now worth $18 billion, making an acquisition a huge undertaking for a consortium of private equity firms and pretty much impossible for a single one.
Mr. Shope says that a special financial model created to assess the likelihood of an L.B.O. showed that a deal would be “difficult,†given both the size of such a transaction and the tax hit that would come from bringing in cash that is currently held offshore.
More realistic prospects include using the cash for “strategic purposes,†including acquisitions, or borrowing debt t o buy back shares. But over all, he writes, even the distant-but-not-impossible prospect of a takeover should provide a decent floor for Dell's stock price.
“We highlight that a L.B.O. transaction or levered recap need not take place to help stabilize the share price, as long as investors begin to increasingly weigh the possibility of a transaction,†Mr. Shope writes.
