Bloomberg News

Dell’s Bidders Plan Computer Maker’s Future Without Founder

March 26, 2013

Blackstone Group LP and billionaire Carl Icahn are offering to buy Dell Inc. (DELL) without retaining Michael Dell as chief executive officer, spurring debate over whether the personal-computer maker would be better off without the entrepreneur who founded it three decades ago.

Dell said yesterday that it has received proposals from Blackstone and Icahn that may be superior to a $24.4 billion buyout plan from Silver Lake Management LLC and Michael Dell.

As CEO, Dell oversaw the company’s rise to the top of the PC industry, yet failed to prepare it for new challenges in mobile technology and high-margin business services. While Dell’s 15.6 percent ownership stake gives him leverage to negotiate a key role, the company could benefit from new leadership that can accelerate efforts to add growth, said Erik Gordon, a business professor at the University of Michigan.

“Michael is no longer essential to Dell,” Gordon said. “His attractiveness as a partner to a buyer is the size of his ownership stake. If you are willing to take less than total control, you don’t need him as much.”

Blackstone invited the executive to use his equity to participate in the transaction, which it’s pitching as a leveraged recapitalization that gives investors a chance to participate. Still, the firm’s proposal doesn’t include Michael Dell as CEO, people with knowledge of the matter said. Icahn also doesn’t intend to keep Dell on as CEO, according to people familiar with his planning.

Dell fell less than 1 percent to $14.50 at the close in New York, 6.2 percent more than the $13.65-a-share offer from Michael Dell and Silver Lake, outlined Feb. 5.

Blackstone Proposal

Blackstone’s plan values Dell at more than $14.25 a share, while Icahn would pay $15 a share in cash for as much as 58.1 percent of the stock, Dell said yesterday in a statement that included their offers. Under both plans, some shares may continue to be publicly traded.

Blackstone, which has teamed up with Francisco Partners (PEF3393), a San Francisco-based technology-oriented buyout shop, and New York-based venture firm Insight Venture Partners, said it plans to fund the transaction with a combination of equity and debt financing, in addition to using Dell’s cash and equivalents.

The Blackstone plan also has envisioned a sale of certain assets, such as the Dell Financial Services business, people have said.

The proposal from Silver Lake and Michael Dell would give the founder majority control, letting him continue to pursue a plan to transform Dell into a provider of a broad range of business-computing services and products.

Dell’s Views

Plans by software maker Microsoft Corp. (MSFT:US) to provide a $2 billion loan for the buyout lessen the likelihood that Dell would sell off its PC division, one of the biggest users of Microsoft’s software.

Michael Dell has expressed different views on the Blackstone bid, people familiar with the matter said. He called the proposal management-friendly and intends to speak with Blackstone this week to get more details, one person said.

Dell has also told other people that he was angered Blackstone didn’t contact him in advance, another person said. He was put off by indications that the firm is seeking new leadership and leaning toward a breakup of Dell, this person said. Blackstone has approached Oracle Corp. President Mark Hurd about running the computer maker, a person said last week.

“Michael could lose complete control of the company, and he doesn’t want that,” said Abhey Lamba, an analyst at Mizuho Securities USA, who has a neutral rating on Dell. “Michael knows the company the best and has not only a financial stake, but also a reputation stake.”

Icahn Offer

Under the Silver Lake-led proposal, Michael Dell would contribute his stake, plus cash, and buyers would pay $13.65 a share. The deal precludes existing shareholders from participating in possible gains.

Icahn is offering investors the option to roll over their stakes or receive $15 a share in cash, with the amount of cash limited to $15.65 billion, according to the statement. Icahn has enlisted Jefferies LLC to conduct due diligence.

Icahn’s offer assumes that Southeastern Asset Management Inc. and T. Rowe Price Group Inc., the largest investors after Michael Dell, would contribute their stakes and won’t receive a cash payment.

Dell’s founder pursued a buyout after failing to keep his company up with the times. About two-thirds of Dell’s sales are tied to low-profit PCs, which businesses and consumers are slow to replace as they adopt tablets and smartphones for many tasks.

Cross-Selling Setbacks

In the lucrative data-center market, where companies are upgrading servers, networks and business software to power complex websites, Dell has cobbled together a patchwork of enterprise storage, networking and software products through about $13 billion of acquisitions the last four years. Yet he’s added new products without always effectively cross-selling them, said Jayson Noland, an analyst at Robert W. Baird & Co. in San Francisco, who has a neutral rating on the shares.

Case in point: Dell is No. 2 in Intel-based servers behind Hewlett-Packard Co. (HPQ), giving it an avenue for selling gear gained through acquisitions, including storage companies EqualLogic and Compellent Technologies, networking firm Force 10 Networks, and Quest Software, which focuses on management.

Yet while Dell has effectively sold its standard-issue PowerVault storage devices with its servers, it’s done a “less good job” selling server customers on higher-end EqualLogic and Compellent systems, Dell vice-president Forrest Norrod said in a recent interview.

Disruptive Departure

Even so, running Dell without the executive who founded it in a University of Texas dorm room in 1984 won’t be easy. Dell might have a hard time retaining customers, attracting new ones and keeping in place a management team that’s been handpicked by the CEO. And while Michael Dell shoulders much of the blame for his company’s performance because he stuck with a low-cost PC model for too long, outsiders may be hard pressed to find someone with the founder’s personal drive to remake his company as an enterprise computing powerhouse.

“It would be disruptive to have him leave,” said Shannon Cross, an analyst at Cross Research in Livingston, New Jersey, who has a hold recommendation on the shares. “You’d have to find a CEO to step in, and there are a lot of changes that need to be made. Dell definitely has made the determination that services and enterprise-type offerings are the future of the company, so he’s going in the direction they want.”

Sales at Dell, based in Round Rock, Texas, will fall to $55.9 billion this year from $61.5 billion in 2011, according estimates compiled by Bloomberg.

Name, Legacy

The stock has plummeted from more than $30 a share in 2007 -- when its founder took back the reins as CEO from Kevin Rollins -- to $10.88 on Jan. 11, the last trading day before Bloomberg News first reported that the CEO was in talks to take back majority control of the company.

For the 48-year-old chief executive officer, once part of a technology-industry pantheon that includes Microsoft Corp. co- founder Bill Gates and Oracle Corp. CEO Larry Ellison, prevailing in a surprise takeover fight could help in the effort to restore Dell’s reputation and performance.

Michael Dell has an incentive to use his stake to lobby for a leadership role long after any buyout goes through.

“He definitely wants to stay involved in the company and put it on a growth trajectory again to redeem his name and some of his legacy,” Lamba said.

To contact the reporters on this story: Jeffrey McCracken in New York at jmccracken3@bloomberg.net; Serena Saitto in New York at ssaitto@bloomberg.net; Aaron Ricadela in San Francisco at aricadela@bloomberg.net

To contact the editors responsible for this story: Tom Giles at tgiles5@bloomberg.net; Jeffrey McCracken at jmccracken3@bloomberg.net


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