Dell goes private in biggest LBO since 2007
by Liz Hester
I’m having flashbacks to 2007 thanks to Dell’s more than $24 billion buy out. It’s a return to the big deal and all the hype that goes along with big companies going private for massive amounts of money.
Let’s take a look at the coverage from Tuesday.
Here’s the New York Times coverage, which includes the text from Michael Dell’s note to employees at the bottom:
Dell announced on Tuesday that it had agreed to go private in a $24.4 billion deal led by its founder and the investment firm Silver Lake, in the biggest leveraged buyout since the financial crisis.
Under the terms of the deal, the buyers’ consortium, which also includes Microsoft, will pay $13.65 a share in cash. That is roughly 25 percent above where Dell’s stock traded before word emerged of the negotiations of its sale.
Michael S. Dell will contribute his stake of roughly 14 percent toward the transaction, and will contribute additional cash through his private investment firm, MSD Capital. Silver Lake is expected to contribute about $1 billion in cash, while Microsoft will loan an additional $2 billion.
The Wall Street Journal added this information about the terms of the deal as well as the process the board is taking to avoid any allegations of favoritism.
The transaction will be financed through a combination of cash and equity contributed by Mr. Dell, cash funded by investment funds affiliated with Silver Lake, cash invested by MSD Capital L.P., a $2 billion loan from Microsoft, rollover of existing debt, as well as debt financing that has been committed by Bank of America Merrill Lynch, Barclays, Credit Suisse and RBC Capital Markets, and cash on hand.
Mr. Dell first approached the board of directors about a buyout in August, according to the company. “The board went through a very disciplined and structured process,” Mr. Gladden said.
The merger agreement provides for a “go-shop” period—initially for 45 days—during which Dell can actively solicit alternative proposals. The buyout group would get a termination fee of only $180 million if Dell strikes a deal with competing bidder during the go-shop period. For a bid outside of the go-shop period, the buyout group would get a $450 million fee.
Reuters added this perspective to its story, outlining the reasons for taking the huge company private.
Dell, whose fairy-tale rise throughout the 1990s and the early part of the next decade once made it a Wall Street darling, has ceded market share in recent years to nimbler rivals such as Lenovo Group. That is in spite of Michael Dell’s efforts in the five years since he retook the helm of the company following a brief hiatus during which its fortunes waned.
As of 2012′s fourth quarter, Dell’s share of the global PC market had slid to just above 10 percent from 12.5 percent a year earlier as its shipments dived 20 percent – the fastest quarterly pace of decline in years, according to research house IDC.
While analysts said Dell could be more nimble as a private company, it will still have to deal with the same difficult market conditions. International Business Machines Corp last decade underwent what is considered one of the most successful transformations of a hardware company, all while trading on public markets.
“This is an opportunity for Michael Dell to be a little more flexible managing the company,” said FBN Securities analyst Shebly Seyrafi. “That doesn’t take away from the fact they will have challenges in the PC market like they did before.”
The deal would be the biggest private equity-backed leverage buyout since Blackstone Group LP’s takeout of the Hilton Hotels Group in July 2007 for more than $20 billion, and is the 11th-largest on record.
The parties expect the transaction to close before the end of Dell’s 2014 second quarter, which ends in July.
The Journal story had the most skepticism about the deal, interviewing shareholders and, in an odd public relations move, rival HP’s statement. It’s rare for competitors to comment publicly on rivals business decisions, making a press release on the topic even odder.
Some stockholders aren’t happy about the deal. James Rosenwald, managing partner at Dalton Investments LLC, said he believes Dell shareholders could do better if the company borrowed money and paid shareholders a large one-time dividend. The hedge fund reported owning 1.1 million Dell shares as of Sept. 30.
Analysts at ISI Group, an investment research firm, said in a note Tuesday that the deal’s price may be “perceived as cheap” and that “the deal could face some shareholder resistance at any price under $15 a share.” But the analysts also said the deal makes sense for Dell and added they see no other bidders emerging in the go-shop period.
Less than two hours after the deal was announced, rival Hewlett-Packard Co. was quick to criticize the takeover, saying the buyout would add uncertainty for customers and limit Dell’s ability to invest in new products.
“Leveraged buyouts tend to leave existing customers and innovation at the curb,” H-P said in a press release. “We believe Dell’s customers will now be eager to explore alternatives, and H-P plans to take full advantage of that opportunity.”
Businessweek had this pithy commentary about the possible reasons for the buyout.
In the intervening years, Dell has spent many billions of dollars buying up services, additional services, and even more of them, alongside software and hardware companies. It’s all part of a grand strategy to become a one-stop technology and services shop for the small to mid-sized companies that IBM (IBM), Hewlett-Packard (HPQ), Oracle (ORCL), and Accenture (ACN) don’t seem to want to bother with. Last year, the strategy was good enough for Dell to post revenue of $62.1 billion and net income of $3.5 billion, while reporting cash flow from operations of about $1.5 billion per quarter.
When you look at these figures, it’s clear that Dell’s financial situation is not dire. The issue has been that investors see little upside in the company’s still-massive PC business and seem to have zero faith that Michael Dell has another big idea in him. Over the past 10 years, investors have pushed Dell shares ever downward and have done so even more aggressively since Michael Dell returned as chief executive officer in 2007.
Add all these factors up, and it starts to become very clear why Michael Dell, Silver Lake, and Microsoft (MSFT) moved to take the company private on Tuesday. Dell was destined to face further years of scrutiny as his company tried to expand its higher-profit software and services businesses. While this may be sound strategy, it takes a long time to execute and certainly does not look revolutionary. Dell basically bought the IBM business plan and made some minor alterations. Michael Dell may be one of the wealthiest, most successful people this country has ever fostered, but such accomplishments must do little to soothe his ego as people ask, again and again and again, why the company has seemed so darned inept in such areas as smartphones and tablets and … well, anything interesting.
Now it remains to be seen what the coming years will bring for Dell, especially when those private equity funds will need to show returns on this massive investment.