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Dell’s stash of cash is the hidden gem in LBO

Billionaire entrepreneur Michael Dell has little to show for years of efforts to turn around his flagging, eponymous company. He spent billions on acquisitions to shift into servers, software and enterprise services, bought back stock and even started paying a dividend.

Most investors didn't care, and those who did were shorting his depressed stock on the assumption that his Dell Inc. was still too anchored to the dying part of the computer business – laptops and desktops. As his firm lumbers off the public stage in a $24.4-billion (U.S.) leveraged buyout , it's tempting to write off Mr. Dell, not yet out of his 40s, as a dinosaur.

But fickle public investors, should they accept the $13.65-per-share offer, will also be bidding farewell to a company that has spewed out annual net operating cash flow of $3.9-billion or more in four of the past five years. If Mr. Dell, who is rolling his equity into the buyout and staying on as CEO, can hold the line on operating cash flows as he continues to move the company into higher-margin, growing parts of the computer hardware business, he stands a good chance of rewarding the buyout group and management who are sticking it out. This is a terrific time to be doing an LBO, with junk bond yields near record lows.

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Mr. Dell now has a set of patient investors – including private equity firm Silver Lake and Microsoft, which is contributing $2-billion in financing – that are willing to give the company's sensible strategic shift a chance. Some companies are better off under private ownership, particularly those with choppy earnings and long-term strategies that don't offer short-term payoffs to keep impatient public shareholders satisfied.

Dell isn't alone in this regard. There are lots of other big, old-line tech companies, such as Hewlett-Packard, that are also generating lots of cash but getting no respect from markets. Perhaps they too could benefit from going private. If Mr. Dell and his peers can turn their fortunes around and create value away from the eyes of public markets, investors will have only themselves to blame for writing them off too soon.

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About the Author

Sean Silcoff joined The Globe and Mail in January, 2012, following an 18-year-career in journalism and communications. He previously worked as a columnist and Montreal correspondent for the National Post and as a staff writer at Canadian Business Magazine, where he was project co-ordinator of the magazine's inaugural Rich 100 list. More


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