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Dell in the Middle of a Bidding War

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PC pioneer Michael Dell, corporate raider Carl Icahn and former Hewlett-Packard CEO Mark Hurd, who lost his job amid allegations of sexual misconduct, may each now be vying for the future of computer maker Dell, as millions of customers and thousands of jobs hang in the balance.

What started as a plan to take the world's third-largest computer maker private has morphed into a high-stakes bidding war involving the biggest names in business takeovers and tech.

The latest saga also pits Stephen Schwarzman, CEO of private-equity giant Blackstone Group, mano a mano with rival directors at Silver Lake Partners, in what is a PC buyout for the books.

Dell on Monday said it will review proposals from Blackstone and investor Icahn, setting the stage for a battle against a group led by CEO Michael Dell -- the onetime tech wunderkind -- over ownership of the beleaguered PC maker.

Shares of Dell were up 2.6 percent to $14.51.

Dell is in tatters from its glory days as PC leader when its founder graced the covers of business glossies, trumpeted for his build-to-order business model that reinvented the supply chain. Much has changed as personal computers have been pushed aside as masses of consumers instead snap up smartphones and tablets.

The resurrection of Dell -- and the sideshow of marquee players -- may leave Dell a much different company but also much the same, industry experts say.

Dell's bid to reinvent itself in a move to go private comes after of years of struggling in a low-margin computer business and lagging profits. Just ask Hewlett-Packard. After Hurd left -- or was pushed out over sexual-conduct allegations -- former CEO Leo Apotheker nearly spun out its PC business in disastrous results to the anxiety of PC buyers and its stock.

Meanwhile, the world order of PCs, dominated by the likes of HP and Dell, is facing a new mobile reality led by Google, Apple and Samsung. That's making such a deal necessary.

"The PC business, in general, is amazingly insecure," says Atari founder Nolan Bushnell, who hired Steve Jobs decades ago in computing's infancy. "If I were Dell, I would just copy Samsung."

Dell 2.0 will likely serve consumers with a slimmed-down lineup of PCs and still offer support, but don't expect a huge retail presence. For consumers, little appears changed but a fact remains: Dell, and the man behind it, need a second act. What that means for buyers of PCs is Dell will stick in business but it may scale back its wares while it does some soul searching.

"I do think they will dial back consumer PCs," says IDC analyst Crawford Del Prete, noting that customers should expect services to continue. "I think they would significantly reduce their footprint at Best Buy."

Dell is generating about $3 billion a year of free cash flow and has more than $12 billion of cash on hand. But there's "no saying how sustainable the $3 billion of free cash flow will be, so that is the key risk," says Richard Sloan, a professor at University of California-Berkeley.


About half of Dell's business comes from PCs, which don't promise fat profits. "It's a very low-margin part of their business," Del Prete says.

Plans hang for Dell to go private and overhaul the company far from the scolding gaze of Wall Street. That could allow for massive layoffs and restructuring as it sets sights on more profitable businesses and slowly pulls away from the PC business.

Critics of Michael Dell's bid to take private his namesake PC brand charge his $24.4 billion offer undervalues the company. Shareholder groups oppose the deal. And the latest moves from Blackstone and corporate buyout king Icahn suggest some money was left on the table.

"We intend to work diligently with all three potential acquirers to ensure the best possible outcome for Dell shareholders, whichever transaction that may be," Alex Mandi, chairman of a special committee of Dell board members, said in a statement Monday.

Del Prete contends Dell, in addition to scaling back its PC business, will need to pivot into profitable areas of services around security, networking and consulting.

Dell will also have to focus on tablets and smartphones, which have been a profit gusher for the likes of Apple, whose fortunes have played a role reversal with Dell's. Dell will definitely stay focused on Ultrabooks that run Windows, Del Prete says, and will likely flirt more with Google's Android on phones and tablets. "I would really look at the whole integration of tablet world in the enterprise," Bushnell says.


The proposal from Blackstone Group would offer $14.25 per share, while Icahn's plan calls for the repurchase of up to 58% of Dell shares at $15 a pop.

Both deals would also maintain Dell's standing as a publicly traded company.

Last month, Michael Dell and Silver Lake Partners announced a plan to take Dell private in a $24.4 billion deal, or $13.65 a share.

The proposal was met with fierce opposition, most notably from Dell's largest outside investor, Southeastern Asset Management. In a separate statement, Icahn Enterprises says it is "pleased" Dell will consider their proposal, adding the initial buyout plan "significantly undervalues Dell."


Corporate raiders and private equity are oft-cited as pirates scavenging troubled companies for booty. Such a reconfiguring of Dell in a privatization could allow new parties to take extreme measures, such as spinning off its PC business. That might lead to an uncertain future for Dell PC owners in the hands of a company new owner.

"Luckily, the number of disastrous leveraged buyouts in tech are fairly small," says says Forrester analyst David Johnson.

Blackstone has reportedly been wooing Oracle President Hurd to take the CEO seat at Dell. In such a musical chairs, founder Dell might land as the chairman to this new computer configuration, bringing two pivotal forces to the storied computer maker.

Hurd "is a man who understands all of the aspects of Dell's business," Del Prete says. "He's very focused on execution."

Hurd turned HP's fortunes and stock around following years of problems before his sudden removal. He was accused of sexual harassment by Jodie Fisher, an actress and marketing contractor who worked as a hostess for HP events. Hurd currently serves as Oracle CEO Larry Ellison's right-hand man.

The buyout battle arrives during a tumultuous time for the PC industry, as consumers abandon desktop PCs in favor of smartphone and tablets.

In the past 10 years, U.S. consumer sales of PC desktop sales have been shaved in half. Tablet ownership, meanwhile, has more than doubled in 2012, according to Forrester. The research firm forecasts 113 million Americans will own a tablet by 2016.

However, the struggles over Dell's fate could leave consumers wary. "Disruption is a bad thing," says Bill Kreher, senior tech analyst at Edward Jones.

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