Dell: What do Blackstone, Icahn actually see?

Story originally appeared on Market Watch.

SAN FRANCISCO (MarketWatch) — With Dell Inc. now waiting for official takeover offers from the Blackstone Group and Carl Icahn, most investors seem to be assuming that the higher bidder will simply win out, and that Michael Dell and Silver Lake will have to raise their original offer.

Since billionaire investor Icahn and the private equity firm Blackstone expressed interest in the struggling computer company, its shares have popped. Dell DELL -0.07%   is now trading more than 5% above the $13.65 per share offer that Dell and Silver Lake made in February to take the company private.

But investors need to think about what may happen to Dell, in the event one of these other bids succeeds, and what the motivations of the other suitors might be.

One element to consider is that both Icahn and Blackstone are offering deals that involve retaining some form of public stock commonly known as a “stub.” This flies in the face of Dell’s founder Michael Dell, who has determined that he needs to take the company fully private to truly make it over.

“Remember that Dell wanted to take the company private so he could do some things, and keep it out of the public eye,” said Roger Kay, president of Endpoint Technologies Associates Inc., a consulting firm. He believes that Dell wants to turn the company into a serious rival to IBM Corp. IBM +1.14%  , with more focus on technology services and software, but that it will still need its PC business, albeit a much smaller one.

“If it has half the revenue it had before, that would cause a lot of discomfort and likely hammer the stock price,” Kay added. “It’s the IBM template. Cycle out the low-margin businesses, cycle in high-margin ones. But the difference is that IBM sold the PC company to Lenovo before people started losing interest in PCs”

It doesn’t help that Dell has virtually no presence in mobile devices such as tablets or smartphones, which are growing rapidly at the expense of PCs. In recent years, the company has instead focused its acquisitions on storage, software and services.

There are not any likely buyers for the company’s PC business as a stand-alone entity, especially since rivals such as Lenovo and Hewlett-Packard Co. HPQ +1.10%   have not made any official overtures. Private equity firms such as Blackstone typically look for businesses to carve off or sell — fueling the belief among some that the aspiring buyers might want to break Dell apart.

So far, the only thing known about the Blackstone offer, as reported by the Journal, is that the company may want to sell Dell’s financing arm. Michael Dell reportedly does not support such a move.

“I doubt anyone else can execute on Dell’s plan,” said Robert Enderle, principal analyst with the Enderle Group. “He is going to massively restructure the company, and turn it into much more of a cloud services entity, to compete much more sharply against Amazon’s AWS.”

Both Kay and Enderle fear that if Blackstone prevails, and part of Dell is left public, the company won’t be able to do some of the housecleaning necessary to morph itself into a mini IBM.

One thing it probably wants to do behind closed doors is whittle down its PC business while keeping part of it. It’s not clear what Blackstone or Icahn would want to do, or who they would put in place to deal with this struggling business, which still is a cash generator. Icahn’s proposal, which some on the Street appear to be taking less seriously, would involve issuing about $5.2 billion in new debt.

Dell called Blackstone’s offer “management friendly,” even after reports surfaced that Blackstone had approached the former CEO of H-P Mark Hurd and Michael Capellas, who was once CEO of Compaq, among his other jobs, for the possible gig. On Tuesday, though, Hurd said at an Oracle event in Tokyo that he was not interested in the job.

On Wednesdaythat Blackstone is open to keeping Michael Dell as the company’s CEO, although it is not clear whether Dell himself is open to the idea. Blackstone also made the case that with Dell on board its proposal, it could be an ally against Icahn, who has warned that he will instigate a proxy fight.

So what exactly do the billionaires on Wall Street want out of a Dell deal? Icahn likely wants a quick return on his approximately $1 billion investment in the company. Blackstone, which is not really know for tech deals, clearly sees some benefit, whether that is immediate or down the road.

“We believe there is significant upside in the Dell business,” wrote Chinh Chu, president of the Boulder Acquisition Group, the Blackstone entity that wants to pay $14.25 a share, in a letter to Dell earlier this week.

While wanting to make money is understandable, it’s not clear yet that the investors with the latest bids have the right ideas on what to do with Dell. The battle for the company that Michael Dell started in his college dorm room is likely just beginning.