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The Deal: Dell Results Offer Hope to LBO

NEW YORK ( TheDeal) -- Dell's (DELL - Get Report) first-quarter fiscal year 2014 results showed a sharp deceleration, with net income falling 79% from the previous year, the company announced Thursday, May 17.

As founder Michael Dell and his proposed takeover partner Silver Lake Partners had been projecting, PC segment operating income decreased 65% to $224 million on revenues that declined 9% to $8.9 billion year-over-year.


The results were in line with many analysts' take on the LBO partners' rationale for their $13.65 per share or $24.4 billion take private offer for the Round Rock, Texas-based company. The deal, which isn't offering much of a premium to shareholders, is viewed as the founder's attempt to remake his company into an enterprise solutions business in the face of the inevitable erosion of the PC market that made Dell into the $23.5 billion market company it is today.

With Carl Icahn and Southeastern Asset Management still out there with their bid for the company for which shareholders can get $12 per share in cash or share in a portion of a publicly traded part of the company, management had to tread a careful line in the earnings conference call when discussing Dell's future.

In response to an analyst's question about profitability in the PC segment, CFO Brian Gladden said, "Clearly recognizing as demand weakened over the course of the last year, we've recognized the need to stop shrinking at a rate faster than the market. And we've made those adjustments over the course of a few different quarters here and have seen the impact of that improve in terms of growth rates and at the same time impact short-term profitability for sure."


One technology banker suggested that the premium offered by Michael Dell and his private equity partner has, to date, kept pace with where markets' trajectory likely would have driven its stock price and was a further indication that the PC maker's buyer anticipates a smaller top line, at least in the near-term.

Besides allowing shareholders to get the benefit of a revitalized Dell, Icahn and Southeastern argue that their proposal is superior because it will only use $5.2 billion in debt, while the LBO will load the company with $16 billion in debt.

Blackstone Group LP, which had been a third in the bidding for Dell, backed away after getting a closer look at Dell's books, saying the company's financial outlook had recently deteriorated more than it anticipated.

Dell's shares were trading almost flat at $13.44 Friday.

By contrast to the PC division, Dell's enterprise solutions group unit saw a 10% increase in revenue for the first quarter to $3.1 billion. Operating income for the division was $136 million, a 71% year-over-year increase. The company's services segment revenue grew 2% to $2.1 billion, while operating income was up 10% to $370 million for that unit, mostly driven by demand for Dell's infrastructure, cloud and security services.


Overall, Dell said, overall first quarter revenue was down 2% to $14.1 billion.

Written by Taina Rosa and Jonathan Marino in New York

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