Dell: Will it work?

February 6, 2013, 1:56 PM UTC

By Verne Kopytoff, contributor

FORTUNE — Dell is headed down a well-traveled path. Investors led by the company’s founder, Michael Dell, intend to take the computer giant private in a $24.4 billion deal that will allow them, if all goes well, to engineer a turnaround without pressure from Wall Street. It is just one of many standard tactics following a leveraged buyout, of which Dell’s would be among the biggest. Success, however, is far from standard, judging from the many companies that have gone through the process.

There are many businesses that have thrived such as disk drive maker Seagate Technology, energy pipeline company Kinder Morgan and DoubleClick, which Google (GOOG) later acquired. But there are also a number that have struggled or gone bankrupt including Extended Stay America hotels and the deeply troubled Tribune Company newspaper chain. “It’s a mixed bag,” says Steven N. Kaplan, a professor of entrepreneurship and finance at University of Chicago.

Revitalizing a troubled business is, of course, difficult, regardless of its ownership. Closing or selling divisions, layoffs and management changes are typical. But leveraged buyouts create the additional burden of saddling companies with debt. Keeping up with interest payments while maintaining regular operations can be troublesome if a company’s business suffers an unexpected hiccup.

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Dell’s (DELL) problem is that its personal computer business is shrinking as customers increasingly buy from other manufacturers or buy smartphones and tablets. As an alternative, the company is trying to shift focus to business services and cloud computing, much like IBM (IBM) has done. The transition has been slow, however. Analysts have increasingly questioned whether the strategy is working.

Dell’s founder, along with Silver Lake, a private equity firm, would take full control in a buyout. The pair has not disclosed any specifics about what they would do. But they are widely expected to take more aggressive steps to revitalize Dell. By taking the company private, they will have greater latitude because they won’t have to please Wall Street investors who inevitably focus on short-term financial results. “There are many serious well-financed competitors,” David Larcker, a professor at Stanford University’s graduate business school, says of Dell and its prospects for turnaround as a private company. “I don’t think it’s a slam dunk.”

In recent years, the number of public companies going private has declined. A lack of bank financing after the recession made borrowing the necessary cash difficult, especially for larger deals. The unique circumstances of each buyout—no matter the era—make generalizing about them difficult. What is clear is that their outcomes vary widely.

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For example, Hellman & Friedman and JMI Equity, two private equity firms, bought DoubleClick in 2005 for $1.1 billion. The company, an early Internet success, had lost steam after the Internet bust. The new owners took the company private, sold off some pieces and rehabilitated its core ad marketplace business. Three years later, they sold the core to Google for $3.1 billion, scoring a sizeable return on their investment in the process.

Harrah’s Entertainment, on the other hand, is a case study of a buyout gone wrong. Apollo Global Management and Texas Pacific Group, two private equity firms, acquired the casino company for nearly $27.6 billion in 2006, just before the economy and tourism tanked. Debt remains a huge weight on the company, which has since been renamed Cesar’s Entertainment.

Dell’s buyout would differ from most others in a number of ways. For one thing, the company’s founder is leading the deal. Extremely wealthy, he plans to plow $700 million his own money into his company. Potentially, he could add more if need be. Furthermore, Microsoft (MSFT), which depends on Dell customers for a big chunk of its software sales, is lending $2 billion to the company. Microsoft may be more flexible than a bank if Dell can’t repay on schedule. (Competitors, meanwhile, reacted to the deal quite differently.)

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Silver Lake, Dell’s partner, has a lengthy track record in technology buyouts. It has handled Seagate along with that of online telephone service Skype and Avaya, the corporate telecommunications company. Traditionally, buyout firms have targeted companies with stable cash flows—to better pay off debt—and physical assets like hotels, airlines and retail that can be used as collateral or easily sold. In the past decade, however, private equity has added technology to the mix.

The ultimate reward for buyout investors is turning around a company and then taking it public again. Doing so allows them to cash out, presumably at a large premium to their initial investment. Maria Nondorf, an accounting professor at University of California at Berkeley, says that Dell has a small window in which to make substantial progress on a turnaround. Otherwise, it will be too far behind to catch up to its many rivals. Any exit for the investors would likely come five to seven years down the line.

“They’re going to need to make a pretty quick turnaround like a year or two years at most,” Nondorf explains. “The company will have to do some innovation so that they’re bringing something to the space that a company like IBM isn’t already doing.”