Dell CEO And Others Take Company Private In $24 Billion Deal

Computer maker Dell is going private in a $24 billion deal that highlights the changing fortunes of the PC industry. The buyout is being led by company founder Michael Dell, software giant Microsoft and the private equity firm Silver Lake Partners.

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From NPR News, this is ALL THINGS CONSIDERED. I'm Robert Siegel.

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We often hear news about companies going public. Well, today comes word that the computer maker Dell is going private. It's a $24 billion deal, and it highlights the changing fortunes of the PC industry. We have more from NPR's Steve Henn.

STEVE HENN, BYLINE: In what is by far the biggest buyout deal since the financial crisis hit, Silver Lake Partners, a private equity firm, the software giant Microsoft and Michael Dell have agreed to invest billions of dollars and borrow close to $16 billion more to buy Dell computer and take it private. Josh Lerner, who studies financial markets at Harvard, says this is a big deal for Wall Street because it signals that the credit system is finally healthy enough to lend out the mountains of cash necessary to make deals like this possible.

JOSH LERNER: But at the same time, it's probably worth emphasizing that this is not one of these deals like we saw in the late 1980s in the era of the barbarians at the gate and so forth.

HENN: Lerner says one of the most common criticisms of private equity deals is that they leave companies staggering under crushing loads of debt. Right now, for example, Dell has roughly $10 billion in cash that it could use to finance mergers or research and development in new products. But after it goes private, a lot more of Dell's cash will have to be spent to pay down its new debt. So when the deal is done, will Dell still have the money it needs to actually keep innovating?

DAVID JOHNSON: I would say that's probably the $64,000 question in this whole transaction.

HENN: David Johnson is an analyst at Forrester Research.

JOHNSON: If they can do that effectively and focus, which I think is what Dell needs most of all, then I think they'll be able to turn the corner.

HENN: A few years ago, Josh Lerner at Harvard got to wondering what happened to research and development at big companies after they're taken private.

LERNER: If all your cash is being sucked off, it's natural to worry that it might be a situation where there are simply less resources for innovation.

HENN: Of course, on the other hand, defending R&D at a big public company isn't always easy either.

LERNER: When one spends money on R&D, it's expensed immediately, and it drags down your earnings. Yet, the benefits from doing it aren't seen for years to come typically.

HENN: So Lerner and his colleagues studied the patents that were filed at more than 500 firms that had been bought out. What they found was surprising: The total number of patents filed before and after these buyouts didn't change much. But...

LERNER: We saw that the importance of the patents that were filed seemed to go up really dramatically.

HENN: These patents were cited by other inventors more often, and they had a bigger impact on these companies' bottom lines. Lerner says research and development at these newly private companies was actually much more effective. He says when managers are freed from chasing quarterly profits, they seem to make smarter long-term investment decisions. David Johnson at Forrester says this is exactly what Dell needs.

(SOUNDBITE OF DELL AD)

HENN: For example, back in 2009 when Apple engineers were hard at work secretly developing the iPad, Dell was spending big money advertising new brightly colored, neon laptops.

(SOUNDBITE OF DELL AD)

UNIDENTIFIED WOMAN: Treat yourself to a Dell Inspiron laptop.

HENN: And today, four years later, Dell still hasn't introduced a single truly successful smartphone or tablet. Johnson says when you're focused on making quarterly earnings number, it can be easy to lose sight of enormous long-term trends. So he says going private might offer Dell some advantages.

JOHNSON: One of them is being able to work outside of the public eye and with less scrutiny.

HENN: Another big plus, according to Johnson, is Dell now has Microsoft's support.

JOHNSON: Most importantly, it will allow Microsoft and Dell to collaborate on things that will mean better integration between the operating system and the hardware.

HENN: This won't just help Dell build better products for consumers. Johnson says it could also allow both these companies to work together and offer unique solutions to their biggest customers: big businesses. And this, he says, is one of the few areas where Dell and Microsoft are still formidable competitors. Steve Henn, NPR News, Silicon Valley.

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