Dell Valuation

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Executive Summary SITUATION: Once the largest computer manufacturer in the world, Dell has slipped to third in line behind Lenovo and HP. With sales of their once famed laptops and PCs quickly declining, their market share has taken a hit as a result. Lenovo and HP are not only to blame for Dell’s demise, Apple and Google have established new markets for smartphones and tablets that has shifted demand to these new toys away from laptops/PCs. These new disruptive technologies are a cheaper and thus more accessible substitute to the old guard (laptops and PCs). COMPLICATION: With Dell’s old core business in rapid free fall and competition eating away at its margins, Dell shares have plummeted from their all-time highs. As a result any…show more content…
The 5 year PEG Ratio of Dell is 2.17 versus 1.12 for Lenovo and 1.645 for the industry. It can be inferred from the Peg Ratio that Dell’s EBIDTA growth rate for the next 5 years is going to less than its peers and the industry. From the ROIC chart shown below, it can be seen that Dell’s ROIC has decreased from 2008 to 2010 and increased in 2011 by about 10%. However, the ROIC is projected to decrease to 2014 and then remain stable @ 20% for the next 10 years. Based on the APV and comparable multiples valuation, it can be seen that the future of Dell looks bleak as it stands today. The Personal Computers (PC) industry is not a great industry to invest in unless you are ready to innovate and adapt to the changing demands of consumers. Adding this to the fact that consumers are slowing moving away from PCs to smartphones and tablets makes it a no-brainer for Dell to make significant changes to its business model as soon as possible DEAL STRUCTURE Dell’s 2013 interest coverage ratio has decreased from about 44 in 2011 to 17.6. This trend is a bit of a concern as the risk of bankruptcy increases with more debt. Dell has about $21.8 billion in liability obligations and $10.9 billion in excess cash ((Yahoo Finance). At a $13.75 per share, an equity amount of $3 billion is needed to complete the deal. It is recommended that Michael Dell stays on as the Chief Executive Officer (CEO) after the LBO deal.
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