Market Overview

Is Dell's LBO Bad for Customers?

Dell's (NASDAQ: DELL) leveraged buyout is causing a bit of commotion within the tech industry.

The company, which was recently accused of violating its option trading rules, has agreed to go private in a management buyout at $13.65 per share. This is only a slight premium over where the stock is currently trading.

Hewlett-Packard (NYSE: HPQ), Dell's chief competitor, jumped on the acquisition news by releasing a self-promoting statement.

"Dell has a very tough road ahead," the company wrote, adding that Dell faces an "extended period of uncertainty" and that the transition "will not be good for its customers."

"Leveraged buyouts tend to leave existing customers and innovation at the curb," HP continued. "We believe Dell's customers will now be eager to explore alternatives, and HP plans to take full advantage of that opportunity."

Investors seem to be siding with HP on this issue, as its stock has risen by roughly two percent this afternoon.

Regardless, Ovum analyst Carter Lusher believes that the buyout makes strategic sense for Dell.

"Dell is in the midst of a wrenching transition from a supplier of commodity hardware, mainly traditional PCs, to being a supplier of enterprise-grade IT infrastructure," he wrote in an e-mail today. "Dell's ambition is nothing less than offering the entire IT stack with supporting services."

Lusher believes that a "significant risk likely to face Dell during this transition" is that enterprises and public sector organizations may reduce their purchases "until the dust settles."

"The implication of going private is that Dell is planning radical changes to its strategy and product roadmap," he continued. "While the company might come out of this transition stronger with a product lineup that better meets the needs of businesses and public sector organizations, there will be uncertainty as to what products and services stay, get strengthen, or get eliminated."

If Dell shifts its production to the business world, it could greatly change the dynamic of the consumer sector. Dell is currently one of the largest manufacturers of consumer PCs.

"Ovum sees effective communication to prospects and customers about its strategy and product roadmap as a, if not the, critical success factor to get through the transition," Lusher added. "While this might sound simple it is not. Compounding Dell's challenge is the deep seated brand identity as a 'PC company.' Another communications challenge will be how Dell Services (built on the Perot acquisition) shares its financials for the due diligence phase on large, multi-year IT services deals.

"Ovum recommends that CIOs need to asset the risk to their infrastructure and put into place plans should Dell's radical hardware, software, and services shifts require changes to procurement plans."

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