Dell Inc. (DELL:US) is going private in a $24.4 billion leveraged buyout that signals the waning of the personal-computer industry it once dominated.
In the largest LBO since the financial crisis, Chief Executive Officer Michael Dell and Silver Lake Management LLC are paying $13.65 a share, the companies said yesterday in a statement. That’s 25 percent more than the closing price of $10.88 on Jan. 11, the last trading day before Bloomberg News reported the discussions.
Michael Dell is taking back majority control of the company he started in a University of Texas dormitory almost three decades ago after struggling to equip the PC maker for a new generation of competitors in mobile and cloud computing. He’s wagering that he can more effectively transform Dell into a provider of a broad range of products for corporations outside the scrutiny of public investors, even while encumbering it with about $17 billion in additional debt.
“Before this agreement the company’s core PC business was deteriorating more than its new enterprise business and the net effect was weak revenue growth,” Shebly Seyrafi, an analyst at FBN Securities, said in an interview. “Now they have the opportunity to be more aggressive and flexible, fix things and turn it around. Normally for deals like this we see a 15 to 25 percent premium, so I think this price is reasonable.”
Even as being private shields Round Rock, Texas-based Dell from answering to public shareholders on a quarter-by-quarter basis, it subjects the company to new constraints, including the addition of debt. Following the transaction, Michael Dell will be chairman and chief executive, maintaining “significant equity,” according to the statement.
Microsoft Corp. (MSFT:US), the top software maker, is contributing a $2 billion loan, according to the statement. The investment helps to support “the long term success of the entire PC ecosystem,” Microsoft said in a separate statement. Microsoft won’t be involved in day-to-day operations, Dell Chief Financial Officer Brian Gladden said in an interview.
Microsoft opted to lend Dell the money to avoid having a stake in one of its PC-maker partners, a move that would have been viewed as favoritism, potentially rankling rival computer companies that also have close ties with Microsoft, according to a person familiar with the matter.
Silver Lake, a technology-focused private-equity firm, was working with partners to line up about $15 billion in funds for the buyout, people familiar with the matter have said.
Dell, which trails Hewlett-Packard Co. and Lenovo Group Ltd. in the PC market, rose 1.1 percent to $13.42 at the close in New York. Its stock plummeted 31 percent last year as it struggled to adapt to the industrywide shift to smartphones, tablet computers and cloud computing services.
“They obviously see the writing on the wall,” said Daniel Morgan, a senior portfolio manager at Synovus Trust Co. in Atlanta. “They understand what the challenges are and realize they need to refurbish what they are doing.”
Michael Dell recused himself from all discussions on the board of directors concerning the deal and from the vote. A special committee handled negotiations with the help of independent financial and legal advisers.
The agreement gives the company 45 days to solicit other potential offers, in what’s known as a go-shop period. A successful counter-suitor would have to pay a termination fee of $180 million. Dell directors considered breaking up the company before opting for the LBO, people familiar with the matter said.
Evercore Partners Inc., which is advising the special committee of the board, also approached other potential buyers and received no alternative bids, a person with knowledge of the matter said last month.
“We believe the board has likely evaluated other options and another bidder is unlikely to emerge at this point,” said Abhey Lamba, an analyst at Mizuho Securities USA Inc.
Dell has seen its fortunes rise and fall since holding an initial public offering in 1988. CEO Dell, who founded the company with $1,000 in 1984, was viewed as an industry wunderkind, demonstrating that he could sell complex products more efficiently and conveniently than was thought possible.
By cutting out middlemen and honing manufacturing so companies and consumers got exactly the PC configuration they wanted, Dell grabbed share and piled up profit even with lower operating margins than rivals like IBM and Compaq Computer Corp., fueling an almost two-decade boom. Eight years after the IPO, Dell’s stake was worth more than $1 billion.
Dell ceded the CEO role to Chief Operating Officer Kevin Rollins in 2004 only to return to the helm in 2007 after the company lost its top PC spot to Hewlett-Packard and earnings fell short of estimates. The company was also beset at the time by an accounting scandal that later resulted in a $100 million settlement with the U.S. Securities and Exchange Commission.
Since his return, Dell has talked publicly about “pruning” his PC business while using the cash it generates to snap up companies in computer networking, storage, and enterprise software. Global PC sales fell 3.5 percent last year to 352.7 million units, market researcher Gartner Inc. said. Dell’s market share fell 12.3 percent to 10.7 percent.
Consumers and companies are shunning PCs in favor of mobile devices made by Apple Inc. and Samsung Electronics Co., and Dell lags behind Oracle Corp., Cisco Systems Inc. and International Business Machines Corp. in data-center hardware, software and services.
The company’s travails are reflected by falling profit. Dell will earn $2.98 billion excluding some items in fiscal 2013, compared with $3.49 billion in 2012, according to analyst estimates compiled by Bloomberg.
There’s no guarantee that Dell will do better as a private business. Companies including networking-equipment maker Avaya Inc. and disaster-recovery software company SunGard Data Systems Inc. have struggled since going private last decade. Chipmaker Freescale Semiconductor Ltd. went public in May 2011 after a 2006 LB0, though its stock tumbled by 19 since then, through Feb. 4.
“Michael Dell has never stated what he wants to do to save the company that he can’t do because Dell is a public company,” said Erik Gordon, a clinical assistant professor at the University of Michigan’s Stephen M. Ross School of Business. “‘More latitude’ is the standard rationale for going private, but it’s just words unless someone has an idea that couldn’t be implemented as a public company.”
Other technology companies have attempted to go private and had the talks fall through over valuations or difficulty in financing deals. That was the case for disk-drive maker Seagate Technology Plc in late 2010 -- though it did have a successful LBO a decade earlier. Fidelity National Information Services Inc.’s buyout talks unraveled in 2010 after the company sought a higher price than private-equity firms were willing to pay.
Emphasizing data-center products and services has helped Dell stave off margin erosion. Gross margin is projected to be 22.4 percent in fiscal 2014, compared with 22.3 percent in 2012.
Still, the transformation into a provider of a range of business services, designed to lessen Dell’s dependence on the PC market, didn’t come swiftly enough to prevent going private from being the more attractive option.
The transaction has an enterprise value of $22.2 billion, reflecting $11.3 billion in cash and $9.03 billion in debt. Excluding Michael Dell’s 14 percent stake, the deal’s equity value (DELL:US) is about $21 billion.
Biggest Since Hilton
If completed, the leveraged buyout would be the biggest since Blackstone Group LP’s $26.2 billion acquisition of Hilton Worldwide Inc., which was announced in July 2007. That deal was struck just as credit markets were seizing up amid a surge in subprime-mortgage defaults. Banks, stuck with loans they couldn’t sell to investors, backed away from financing leveraged takeovers.
While debt markets have loosened up since 2010 as interest rates have fallen, the biggest LBO since 2007 was the $7.2 billion KKR & Co. paid for Samson Investment Co., the Tulsa, Oklahoma-based oil and gas producer, in 2011.
Along with Evercore, JPMorgan Chase & Co. served as financial adviser and Debevoise & Plimpton LLP provided legal advice to the board committee. Goldman Sachs Group Inc. provided financial advice, while Hogan Lovells US LLP acted as legal adviser to Dell. Wachtell, Lipton, Rosen & Katz acted as legal adviser to Michael Dell. Bank of America Corp., Barclays Plc, Credit Suisse Group AG and Royal Bank of Canada gave financial advice to Silver Lake, with Simpson Thacher & Bartlett LLP acting as legal counsel. Microsoft was advised by Lazard Ltd.
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