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Dell: Better Off Private?


Dell (DELL) shares climbed 13% on Monday after the Wall Street Journal reported that private equity firms Silver Lake and TPG have been in talks with the company about going private. The jump in came as a welcome change of pace for Dell shareholders who have seen their stock drop more than 20% in the last year and 40% over the last five years as the company gropes for a way to overcome flagging growth in market for its flagship PC product.

Taking Dell private would eliminate the company's need to resort to financial machinations to create the illusion of growth. Dell's EPS improvements mask stagnant revenues. From fiscal 2009 to the end of fiscal 2012, company revenue climbed from $60.8 billion to $62.8 billion. Of such non-growth are P/E multiples under 10 born.

Hugh Johnson the eponymous CIO of Hugh Johnson Advisors says Dell and other PC-linked companies would be well served by getting out of the spotlight. "They need to do what anybody would do under these conditions, which is get out of the scrutiny of the public," he says in the attached clip.

Private companies don't have satisfy Wall Street's lust for growth. In the name of supporting shares and giving the illusion of earnings growth, Dell spent $2.7 billion buying its own shares in 2012. The pointless buyback is just one of the Sysphean games played by all public companies that go away the second a takeover is complete.

Without having to placate shareholders Dell can hum along, spit out cash, and look for opportunities too radical to pursue under a public model. In the meantime its core business, a classic diminishing asset in the form of a large market share in a shrinking business, will slowly erode.

"As an overall strategy it's a really good idea" says Johnson. Judging by the price action of the stock since the rumor hit the wires, Dell shareholders would have to agree. The private route may not be sexy, but it just may be the best option for Dell.