Can private equity solve Dell’s dilemma?

January 16, 2013, 4:39 PM UTC
Michael Dell

FORTUNE — Details continue to leak about a possible leveraged buyout of Dell Inc. (DELL), the once high-flying computer maker that has fallen on hard times.

Initial reports late Monday were that private equity firms Silver Lake Partners and TPG Capital both were in talks with Dell, but Fortune has learned from multiple sources that each firm was working independently and that TPG has walked away. That leaves Silver Lake alone, with The Wall Street Journal reporting that the firm is trying to finalize a $23 billion to $25 billion buyout that could include participation from both Michael Dell and a large pension fund or sovereign wealth fund.

This is the most attention Dell has received in quite some time. In the all-important world of tech services, the company is a niche player. In hardware, it’s known for utility rather than innovation. It’s also losing marketshare to Hewlett-Packard (HPQ) and Lenovo (LNVGY). And Dell barely registers as a software player.

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The company’s market cap hints at this move toward obsolescence. Dell entered the millennium valued at more than $100 billion. When buyout speculation surfaced in 2010, it was worth about $28 billion. Before the buyout news surfaced this week, it was valued at just $19 billion.

While the market and analysts have endorsed the idea of a buyout, it’s hard to understand how the move will actually improve Dell, particularly since Michael Dell himself seems poised to retain control over the company. Dell, who owns almost 16% of the PC-maker, would contribute a significant amount of equity to the deal. It’s hard to imagine that he would do so and not retain control. One person with knowledge of the buyout negotiations notes that Michael Dell was keenly interested in continuing to lead, even after his company was taken private.

Therein lies the core problem: Michael Dell has been trying to fix his troubled company ever since he returned as chief executive in 2007, and he has never come up with an effective plan. By his own admission, he is not an innovator and will never turn Dell into the next Apple or Samsung. Rather, he is happy to build products around the intellectual property of other companies. And while Dell has been on an acquisition spree — spending about $5 billion to buy networking, services, storage and software companies last year — it still relies on hardware sales for more than half of its revenue.

Michael Dell already has the power to make pretty much any change he’d like to make at the company. He’s the majority owner. He has a board that believes in him. And he has the mystique of being the boy wonder founder who is still described as a “rock star” at the company’s Round Rock, TX headquarters.

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But as Fortune chronicled in a 2011 look into the company, Dell has been an architect of his company’s strategy woes as much as he was the genius behind its initial manufacturing success. From interviews with dozens of past and present employees, he emerged as a cautious manager who could not end Dell’s reliance on hardware. His plan has been to acquire scores of small companies and hope that the new entrepreneurs injected some innovation, fresh ideas and talent into the company. Those businesses have grown fast, but from a small base, meaning that Dell tends to dominant in niche businesses.

Michael Dell seemed unconcerned that these acquisitions were just too small to move the revenue and profit needles. And he alone seemed to set the parameters for the company’s vision and mission.

While Dell has the basic elements of a diverse enterprise solutions company, the company feels more like a specialty food store with a few niche items rather than a supermarket that can satisfy a broad range of customers. At the time that Fortune published its 2011 story, analysts were giving the company two years to make significant changes, saying that Dell didn’t have time to buy myriad companies and make them big enough to impact the bottom line.

Going private will shield Michael Dell from public scrutiny as he tries to right the ship, something that may seem very appealing. But it will also box Dell in. Free cash flow that could go to transformative acquisitions would be spent servicing the debt needed to do the deal. Taking on so much debt for buyout would also make it hard to borrow money later on to implement new business strategies.

Most companies go private because they have an execution problem, and a buyout firm promises a solution that’s often some combination of cost reduction, management changes, and a bold strategy shift. Dell is already known for being among the most cost conscious companies around. Michael Dell’s likely involvement post-buyout will mean no real management change. And he has made it clear over the last six years that he does not favor bold strategy shifts. He prefers to change the company in a slow and steady fashion, much like Lou Gerstner at IBM before him. But IBM was ahead of the curve when it moved away from PCs. Dell is behind that curve, and doesn’t have the luxury of time.

There’s nothing about Dell the company that says the problem it has is being public. The stock price, earnings, and acquisition strategy point to a management issue that is not likely to be solved if Michael Dell doesn’t cede significant control to the private equity buyers who presumably want to change the company. If Silver Lake (or whomever wants to buy Dell) is simply betting on MIchael Dell’s ability to transform his business and his thinking, then this is a risky buyout indeed.


Update: When asked to comment on Silver Lake and going private, the role Michael Dell would play at the company after a buyout and the company’s turnaround strategy, company spokesman David Frink emailed the following:

“We are not commenting on the private equity speculation. We will say that we have our strongest-ever product and services portfolio, and have acquired significant new skills and capabilities, reorganized our operations, optimized our global supply chain and put in place a world-class management team. Today’s Dell is an end-to-end technology solutions provider, one that has evolved from a PC manufacturer to a true IT solutions partner.

We have made significant progress in executing our enterprise solutions strategy and continue to add to the company’s capabilities. In the third quarter (most recently reported) our Enterprise Solutions and Services business revenue was $4.8 billion, up 3 percent, led by 11 percent growth in our server and networking business. These businesses which were about $14 billion in FY08 are on an annual run-rate approaching $20 billion, year-to-date, are up 4 percent from the previous year and have generated greater than 50 percent of our non-GAAP gross margin over that time.

While there’s no question we are in a challenging global IT demand environment, especially in the core PC business, we are fully committed to our strategy. We continue to make key investments to drive our transformation.”