IPO on cards when Dell moves back to square one

The business fraternity was a bit puzzled when Michael Dell unveiled plans to take his namesake company public once again, this time without an initial public offering. What caught the market’s fancy was the complicated procedure outlined for the company to return to the public realm, involving the purchase of ‘tracking stock’ from investors of its majority-owned subsidiary VMware (VMW).

However, the management is currently weighing other options, including a traditional IPO, after the idea of share repurchase got a thumbs-down from investors including hedge funds and Carl Icahn, who holds a stake in Dell. Icahn’s hostile relationship with the management is widely known, which turned bitter when Dell resisted the activist investor’s objection and successfully transformed the company into a private entity in 2013.

It seems Michael Dell has woken up to the advantage of following the traditional path, also considering the additional strain the stock buyback could put on the company’s coffers. When the Texas-based PC maker grew in scale and broadened its offerings, ranging from networking and cyber security to storage and servers, after a series of acquisitions, so did its debt.

The management is weighing other options after the idea of a share repurchase got a thumbs-down from investors

Dell’s high debt could be a dampener for potential investors when it comes to an IPO. And, the current situation raises questions about the rationale behind Dell’s decision to go private, though the intention behind the transformation was noble.

While Dell managed to pay off a portion of its debt in recent years amidst a marked improvement in cash flow, more needs to be done to achieve financial stability. Though the management had explored the option of a reverse acquisition at one point, wherein VMware would acquire Dell, it was scrapped later.

An official statement from the company this week revealed that Michael Dell and other top executives held discussions with investment banks about pursuing an IPO of Dell’s class C stock if the proposed buyback of tracking stock does not go as per the plan. This strategy is a deviation from the company’s earlier stance that it would maintain ‘status quo’ if the stock buyback falls through.

Moreover, the management is buoyed by the recent financial performance of the company, which registered double-digit growth in earnings and revenue in the second quarter. The overall improvement in operations also resulted in an upward revision of the full-year outlook. Experts believe even if the latest initiative ends up in an IPO, the company would eventually force holders of the tracking shares to sell them.

Reflecting shareholders’ concerns over the potential repurchase, Dell’s tracking stock has been trading sharply below the company’s $109- per share offer.

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