Dell Is in Really Big Trouble

by Tom Taulli | April 19, 2013 12:19 pm

Dell Is in Really Big Trouble

Private equity player Blackstone (NYSE:BX[1]), for the most part, knows what it’s doing[2]. So when Blackstone loses interest in a deal, you might have to wonder how much hope there is for the targeted company.

Yesterday — after extensive due diligence, which involved analyzing the company’s business plan and financial forecasts – Blackstone wrote a letter[3] to Dell (NASDAQ:DELL[4]) management indicating that it had dropped its offer to buy the struggling PC maker.

The letter is short, but it has some discouraging remarks about Dell’s prospects. It notes that the PC market is horrible. (Remember that 14% plunge in volume from the first quarter of this year?) And on top of the industry problems, Dell’s financial situation is rapidly deteriorating. During the past month, the company has reduced its full-year operating income projection from $3.7 billion down to $3 billion.

Blackstone is one of the world’s best investment firms, and it’s biggest at $218 billion in assets under management. The firm has snagged a score of big wins, such as today’s sought-after SeaWorld (NYSE:SEAS[5]) IPO, as well as PBF Energy (NYSE:PBF[6]) and Pinnacle Foods (NYSE:PF[7]).

The company tends not to focus on “sexy” companies, which is nice because it often means attractive valuations, and its strong team knows how to restructure companies and get them back on track.

But one of Blackstone’s biggest keys to success has been its discipline — if the numbers and the outlook aren’t up to snuff, the firm is quick to say “no.”

So when Blackstone says it doesn’t like Dell, you can take that to the bank. If BX can’t get things back on track, few others are going to be equal to the task.

This rejection has broader implications as well. The PC market appears to be undergoing a secular decline amid a rise in the mobile market. Smartphones have become the main way that users access the Internet, and tablets from Apple (NASDAQ:AAPL[8]) and those running Google‘s (NASDAQ:GOOG[9]) Android operating system are becoming more the norm — two trends that aren’t going away.

This has meant (and will continue to mean) bad things for companies lacking on the mobile front, such as Microsoft (NASDAQ:MSFT[10]), Hewlett-Packard (NYSE:HPQ[11]) and, of course Dell … and even Intel (NASDAQ:INTC[12]).

Making a comeback will only get more difficult as the top players in the market continue to solidify their market positions with next-generation technologies.

And Blackstone appears to think Dell just doesn’t have enough ammo for that battle.

Tom Taulli runs the InvestorPlace blog IPO Playbook[13]. He is also the author of High-Profit IPO Strategies[14]All About Commodities[15], and All About Short Selling[16]. Follow him on Twitter at @ttaulli[17]. As of this writing, he did not hold a position in any of the aforementioned securities.

Endnotes:
  1. BX: http://studio-5.financialcontent.com/investplace/quote?Symbol=BX
  2. knows what it’s doing: http://investorplace.com/2013/03/why-blackstone-is-best-for-dell/
  3. wrote a letter: http://blogs.wsj.com/moneybeat/2013/04/19/blackstones-letter-to-dell-we-will-not-be-pursuing-a-deal/
  4. DELL: http://studio-5.financialcontent.com/investplace/quote?Symbol=DELL
  5. SEAS: http://studio-5.financialcontent.com/investplace/quote?Symbol=SEAS
  6. PBF: http://studio-5.financialcontent.com/investplace/quote?Symbol=PBF
  7. PF: http://studio-5.financialcontent.com/investplace/quote?Symbol=PF
  8. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  9. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  10. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  11. HPQ: http://studio-5.financialcontent.com/investplace/quote?Symbol=HPQ
  12. INTC: http://studio-5.financialcontent.com/investplace/quote?Symbol=INTC
  13. IPO Playbook: http://investorplace.com/ipo-playbook/
  14. High-Profit IPO Strategies: http://goo.gl/TXQsz
  15. All About Commodities: http://goo.gl/FfP8R
  16. All About Short Selling: http://goo.gl/t5Jzb
  17. @ttaulli: https://twitter.com/ttaulli

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