In light of the restructuring of U.S. corporate tax laws under Trump, Dell may need to consider going public again in order to raise enough capital to cover rising debt.
As a result of going private in 2013, as well as acquiring EMC Corp. in 2016 via a $67 billion deal, Dell has accumulated debt with a real value of around $7 billion. This debt has now ballooned to around $48.5 billion due to extra inflationary costs and the new tax reform that could render it more expensive to borrow money.
"Tax reform threw them a curveball," said Jordan Chalfin, an analyst at CreditSights. "It put a wrench in their deleveraging plans."
The company is therefore exploring various options to raise cash, including putting out a public stock offering. Dell's board is expected to meet later to reach a decision on the matter.
What are the specific aspects of the overhaul that will negatively impact Dell?
For starters, the new law entails deducting interest expenses equal to only around 30% of Dell's income, resulting in a potential loss of $100 million a year. In late November, Dell joined several other companies in signing a letter to Senate leaders opposing a stricter version of the deduction limitation than what ultimately become law.
Dell's overseas assets become taxable under the new law as well, which could result in a huge bill of $6 billion over a few years for the tech company. The prospect of rising interest rates will also negatively impact the amount of cash the company has. Around $12.9 billion of the company's loans as of November 3rd were tied to the floating rate known as the London interbank offered rate, or Libor. Since the closing of the EMC deal, the rate has shot up by 92 points, adding an incremental amount of $115 million to existing costs (assuming that the risk was not hedged).
Dell may need to go public not only for itself, but also for companies that have a stake in its debt, like Silver Lake. Silver Lake (ASX: SLR) owns about 24% of Dell and helped fund the EMC deal. However, it may be looking to exit the space, in which case Dell would need the cash from an IPO more than ever.
Alternatively, a solution to Dell's financial problems could exist in the form of a public share sale for its Pivotal Software Inc. cloud-computing venture. Dell could possibly obtain a valuation of $5 billion to $7 billion, which would do much to put Dell back on the road to recovery.
There are a slew of other companies wanting to go public this year as well, including file-sharing company Dropbox Inc. and music mogul Spotify, the world's largest music subscription service. Dell is definitely the most high profile and would garner a lot of attention, resulting in more opportunity to make up the debt.
Either way, the board needs to approve whatever leadership decides. Dell is also considering selling shares to the public, or possibly a transaction with software maker VMware Inc.