Michael Dell is extending a lucrative relationship reaching back to the late 1990s with his pick of Silver Lake Management LLC, the largest technology-focused private-equity firm, to pursue a $24.4 billion leveraged buyout of his computer company.
The link began with Roger McNamee, a Silver Lake co-founder who left the Menlo Park, California-based firm in 2004. McNamee managed an influential technology fund for T. Rowe Price Group Inc. in the 1980s, and when he moved on to form Integral Capital Partners in 1991, he invited the founders of many of the companies he’d invested in to join his new fund. Dell, Microsoft (MSFT:US) Corp.’s Bill Gates and Oracle Corp.’s Larry Ellison were among those who accepted, said three people familiar with the matter. When McNamee went on to Silver Lake, Dell invested in the firm’s first fund.
Silver Lake has been involved in some of the most successful technology LBOs, including those of Skype Technologies SA and Seagate Technology Plc. That experience, combined with its ties to Michael Dell, gave it a big edge when the 47-year-old billionaire went looking for a partner to take the company private.
“Silver Lake is one of the very few buyout firms to legitimately lead this transaction given Dell’s technology orientation and the strategic repositioning required,” said David Fann, chief executive officer of TorreyCove Capital Partners LLC, a La Jolla, California-based firm that advises private-equity managers and investors.
Silver Lake and Michael Dell agreed today to pay $13.65 a share to take Round Rock, Texas-based Dell Inc. (DELL:US) private in the largest leveraged buyout since 2007, in an attempt to transform the world’s third-biggest maker of personal computers away from the scrutiny of public shareholders. Microsoft is providing a $2 billion loan to help finance the transaction, according to a statement today.
Gemma Hart, a spokeswoman for Silver Lake at Brunswick Group Inc., declined to comment for this story, as did David Frink, a spokesman for Dell, and Todd Fogarty, a spokesman for Michael Dell’s MSD Capital LP at Kekst & Co.
Michael Dell backed at least five Integral funds that earned an aggregate 24 percent annual return through early 2001, when they were liquidated and investors got their money back, said one of the people asking not to be named because the information isn’t public. “Those early Integral funds did well,” Rod Canion, former chief executive officer of Compaq Computer Corp. and also a client, said in an interview.
Anticipating that Web-inflated stocks were about to burst, McNamee and longtime technology investment banker James Davidson started Silver Lake in 1999 to be ready to buy stakes in out-of- favor companies. Raising their first fund, the pair traveled to Dell’s Austin, Texas, home to make their pitch, said two people familiar with the meeting. Half in jest, they did the presentation on a Macintosh laptop, made by Dell rival Steve Jobs, to grab the CEO’s attention. Sure enough, Dell sent Silver Lake one of his company’s new Latitude laptops the next week. He ended up putting an undisclosed amount in that initial buyout pool.
With the Dell LBO, Silver Lake cements its status as the biggest private-equity investor devoted to technology companies. The firm has taken part in deals valued at more than $80 billion, according to data compiled by Bloomberg.
Silver Lake oversees $14 billion in assets, not including the more than $7 billion that people briefed on the matter say the firm has raised for its latest fund. The firm is “putting together the final touches” on the fund, one of the largest since the 2008 financial crisis, Fann said. Silver Lake counts more than 100 deal makers and operations experts among its employees, according to its website, with offices in Silicon Valley, New York, London, Hong Kong, Shanghai and Tokyo.
Before Silver Lake opened, most private-equity investors had little interest in technology. Even strong businesses could be upended by innovation, and management teams wanted to invest heavily in research and development to win fast-growing markets rather than add debt that had to repaid. Silver Lake’s thesis was that growth in many of those markets would slow, creating opportunities as stocks plunged.
The founders looked at the trend from several perspectives. McNamee, 56, was the investor, and Davidson, 53, had been a deal maker at Hambrecht & Quist, one of the best-known boutique investment banks in Silicon Valley before it was acquired by Chase Manhattan Bank in 1999. The other founders were former Oracle executive David Roux, 56; and Glenn Hutchins, 57, an LBO specialist formerly of New York-based Blackstone Group LP.
McNamee went on to help start Elevation Partners, while the others remained. Former Cisco Systems Inc. executive Charles Giancarlo joined Silver Lake as a partner in 2007.
Silver Lake’s lead deal maker on Dell was Egon Durban, a Georgetown University graduate and former Morgan Stanley banker who has been with the firm since its inception. Morgan Stanley was a minority owner of McNamee’s Integral Capital Partners, and when McNamee and Davidson began the work of creating Silver Lake, Morgan Stanley allowed Durban to spend a year working out the details with them, according to a person familiar with the agreement.
Durban never left, and he went on to open and run the firm’s London office for five years, according to Silver Lake’s website. He led Silver Lake’s investment in Skype in 2011.
Not all of Silver Lake’s deals have worked out.
Networking equipment-maker Avaya Inc., which went private in 2007 in an $8.2 billion deal, hasn’t gone ahead with a $1 billion public offering filed in 2011. That year, Silver Lake was part of a $950 million investment round in Groupon Inc. (GRPN:US), the online-coupon company whose shares have dropped 74 percent since its IPO that November. Stakes in both companies were being carried below cost as of Sept. 30, according to a Silver lake marketing document, a copy of which was obtained by Bloomberg News.
Still, Silver Lake has plenty of big wins. Its most recent flagship fund, raised in 2007, was producing an 18 percent net internal rate of return as of June 30, according to data from California Public Employees’ Retirement System, a client.
Skype -- one of the investments in Silver Lake’s third flagship fund -- earned a more than threefold profit for clients when the video-chat company was sold to Microsoft in 2011 for $8.5 billion. That deal strengthened ties between the firm and Microsoft, which is contributing $2 billion in funding for the Dell buyout. Hutchins, the Silver Lake co-founder, is a friend of Microsoft CEO Steve Ballmer, a fellow 1977 Harvard University graduate and co-chairman of the class gift committee.
Silver Lake’s second fund, raised in 2004, was generating a 10 percent net IRR, Calpers’s data show. The firm’s best results came from the $2.3 billion debut fund, Silver Lake Partners LP, which was producing a 25 percent return.
Much of that success came from the 2000 LBO of disk-drive maker Seagate. Competitive concerns had caused Seagate’s shares to trade for well below the value of its large stake of Veritas Software, a high-flying Internet stock before the crash. To win support for the LBO, Silver Lake distributed the Veritas shares to investors. After massive job cuts and investments in automation, Seagate went public again in 2002.
At the time the biggest technology LBO, the deal returned more than eight times investors’ money, according to another marketing document. Seagate’s 2002 IPO, which raised $870 million, was the year’s largest.
Operational improvements aside, that deal worked mainly because of Veritas, said two people involved in the buyout.
That may explain why Seagate failed to go private once more in 2010, when its stock was again out of favor. The company had talks with private-equity firms TPG Capital and KKR & Co. (KKR:US) Without Veritas in the mix, the banks couldn’t agree on a deal that would have been valued at about $7 billion.
Michael Dell hasn’t wavered from his plan to decelerate Dell Inc.’s PC revenue and boost sales of higher-end data center gear, said Richard Kugele, an analyst at Needham & Co. The company is heading in the right direction by investing to expand from PC servers into other enterprise-computing gear, Kugele said.
Dell Inc. also has no clearly undervalued assets lying around, he said. That means Silver Lake and its investors must rely on better execution to pay off the debt and boost results to the point where the company could again go public or become an acquisition target.
Having put his 14 percent stake in the company into the buyout, Michael Dell has never had more to gain from Silver Lake’s success.
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