Bloomberg News

Michael Dell Said to Consider Blackstone LBO Only With CEO Guarantee

April 01, 2013

Dell Inc. Founder Michael Dell

Dell Inc. founder Michael Dell told his board that going private would be the best course of action because it would let him boost spending on acquisitions, sales staff and research and development, while investing in PCs and tablets and expanding Dell’s reach in emerging countries. Photographer: Tony Avelar/Bloomberg

Dell Inc. (DELL:US) founder Michael Dell will only consider backing a buyout by Blackstone Group LP (BX:US) if the private-equity firm guarantees he can remain as chief executive officer, according to a person familiar with the discussions.

In several recent meetings in Austin, Texas, with Chinh Chu and David Johnson -- the Blackstone executives overseeing the firm’s bid -- Michael Dell said he would be more likely to support their proposal if he retained an influential role, a second person familiar with the talks said. Negotiations are ongoing and the two sides may not reach an understanding.

Michael Dell said on Feb. 5 that he agreed to take his company private in a $24.4 billion transaction with Silver Lake Management LLC. He’s now using his 15.6 percent stake as leverage to preserve his leadership position as the company weighs competing offers from Blackstone and billionaire investor Carl Icahn, said one of the people, who asked not to be named because the talks are private.

If another bid is superior and bars him from future involvement in the company, CEO Dell would cash in his shares and walk away, leaving the buyer to replace about $4.5 billion in financing he could have contributed, one person said.

Silver Lake

Blackstone had initially assumed Michael Dell wouldn’t participate in a buyout with the firm, according to one of the people. Silver Lake, which until a few days ago perceived Michael Dell as hostile to Blackstone’s proposal, now considers it possible that the CEO will drop out of their joint bid to back an alternative proposal, another person said. Michael Dell didn’t inform Silver Lake of his recent meetings with Blackstone, one person said.

David Frink, a spokesman for Dell, couldn’t be reached for comment. Peter Rose a spokesman for Blackstone, and Charlotte McCrum, a Silver Lake spokeswoman at Brunswick Group, declined to comment.

The offers from Blackstone and Icahn could end up being superior to the $13.65-a-share buyout planned by Michael Dell and Silver Lake, according to a statement last week from Dell. Silver Lake and Michael Dell’s buyout proposal -- which requires approval from a majority of shareholders excluding the CEO -- has been criticized by the company’s biggest outside investors as too low. Rival bidders had a deadline to put forth alternatives, and the company has said it’s open to working with third parties on new proposals.

Original Bid

The challenges to the original bid, which came as Dell struggles to catch up with a new wave of nimbler competitors in mobile computing and business services, mean Michael Dell could lose control of the firm he founded in his Texas dorm room. His plan was to retool Dell as a maker of data-center gear and software for corporations -- without the scrutiny of public investors.

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 March 25. Under both plans, some shares may continue to be publicly traded. Icahn’s proposal wouldn’t require Dell’s involvement.

Blackstone’s discussions with Michael Dell have been constructive, and the private-equity firm hasn’t indicated that it wants to replace him, one person said. Blackstone had approached Oracle Corp. (ORCL) President Mark Hurd about running Dell, a person familiar with the matter told Bloomberg last month.

KKR, TPG

After Silver Lake said in August that it was interested in pursuing an LBO, Michael Dell called KKR & Co. co-founder George Roberts to see if the New York-based buyout firm might also look into a deal, another person said. Dell has known Roberts for years, the person said.

KKR evaluated Dell and eventually dropped out, according to the person.

CEO Dell also met late in December with TPG Capital’s David Bonderman and John Marren, the person said. TPG said no twice: Last year and during the go-shop period when the computer maker had an opportunity to solicit alternatives to the buyout by Michael Dell and Silver Lake, the person said. KKR and TPG were the only private-equity sponsors aside from Blackstone and Silver Lake that considered backing a buyout, the person said.

KKR spokeswoman Kristi Huller and Owen Blicksilver, a TPG spokesman at Owen Blicksilver Public Relations, both declined to comment.

June Kickoff

Dell’s shares fell less than 1 percent to $14.30 at the close in New York, about 4.8 percent above the original buyout price.

Negotiations for a possible buyout of Round Rock, Texas- based Dell were kicked off in June by the company’s largest outside investor, Southeastern Asset Management Inc., according to a proxy statement filed on March 29 with the U.S. Securities and Exchange Commission. Initial discussions included Southeastern, company executives, a special committee of the board, Silver Lake and their respective financial and legal advisers.

CEO Dell told his board that going private would be the best course of action because it would let him boost spending on acquisitions, sales staff and research and development, while investing in PCs and tablets and expanding Dell’s reach in emerging countries, according to the filing.

Undertaking those investments while trading on public markets would be “poorly received” by investors since they would “weaken earnings and cause greater volatility” in the stock price, Dell told the board during a presentation in December.

Contentious Negotiations

The documents also lend insight into the sometimes contentious negotiations between Dell’s representatives and private-equity firm Silver Lake, which came close to walking away from the deal in January, as well as a stalemate that wasn’t resolved until Silver Lake upped its final offer by 5 cents a share at the eleventh hour -- ultimately boosting the bid 22 percent from $11.22 at the outset.

On July 17, Michael Dell met a representative of Silver Lake at the Fortune Brainstorm technology conference in Aspen, Colorado, and they arranged to meet again in August.

In mid-August Dell told Alex Mandl, the company’s lead independent director, that he was interested in possibly taking the company private and asked for information to study the feasibility of a leveraged buyout. The board was open to the idea. In late August, the company reported revenue of $14.5 billion, about $800 million less than the board had forecast in June and $300 million below a revised outlook.

Non-Binding Proposals

By the end of the month, the board had retained law firm Debevoise & Plimpton LLP and JPMorgan Chase & Co. as its advisers, and by early September, the company had entered into confidentiality agreements with Dell, Silver Lake and a second private equity firm identified only as “Sponsor A.” That firm is KKR, according to a person with knowledge of the matter.

On Oct. 23, when Dell’s share price closed at $9.35, Silver Lake and KKR submitted preliminary, non-binding proposals to acquire the company. Silver Lake bid $11.22-$12.16 a share for all stock excluding that of Michael Dell, whose collaboration was a condition of the offer. Sponsor A bid $12-$13 for all shares except Dell’s and Southeastern’s, and suggested an additional $500 million investment on Michael Dell’s part.

On Nov. 15, Dell reported quarterly earnings that missed analysts’ expectations and its own guidance again, causing its shares to fall about 7.3 percent to a three-year low of $8.86. By then, it had hired Goldman Sachs Group Inc. and Boston Consulting Group Inc. as advisers.

Revised Bids

Boston’s research would later underscore the decline in Dell’s business. The division that includes PCs would decline by as much as $10 billion in four years, Boston predicted. Acquisitions “had yielded far lower returns” than management had expected, the firm said.

Also in November, Silver Lake and Sponsor A submitted revised bids, and on Nov. 30, Dell expressed his enthusiasm for an LBO to the board, saying he could “supply as much additional equity as might be needed for a transaction.”

On Dec. 3, Goldman Sachs analysts wrote a report suggesting that Dell might be the target of an LBO, sending the company’s shares up 4.4 percent to $10.06. That same day, Sponsor A withdrew from the process, later citing the uncertain market for personal computers and competitive pressures on Dell for its decision.

The following day, Silver Lake submitted a revised bid of $12.70 per share.

On Dec. 6, Michael Dell told the board he thought that his plans to invest in research, development and M&A, as well as expanding the company’s sales staff and emerging markets operations, would be better undertaken as a private company than as a listed one.

‘Weaken Earnings’

“Mr. Dell reiterated his belief that implementing such initiatives would require additional investments that could weaken earnings and cause greater volatility in the performance of the common stock,” according to the filing.

On Dec. 10, the board told Silver Lake any bid would have to be significantly higher. At that point, Silver Lake said it would need to seek financing from Microsoft Corp. (MSFT) That month, TPG -- identified in the proxy only as Sponsor B -- also signed a confidentiality agreement with Dell, a person with knowledge of the matter said.

On Jan. 16, two days after Bloomberg News first reported that Dell was in buyout talks, Silver Lake submitted a bid of $12.90 per share, backed by commitments from Barclays Plc, Bank of America Corp., Royal Bank of Canada and Credit Suisse Group AG, as well as $2 billion from Microsoft.

General Electric

The board balked at the price, and said it would support a bid of $13.75 per share. Silver Lake responded that it could offer no more than $13.25, though it raised that to $13.50 later in January. Dell lowered the valuation of his rollover shares to $13.36 so that Silver Lake could raise its bid to $13.60.

On January 24, Dell advisers received calls from Blackstone, Southeastern and a so-called Strategic Party A expressing interest in all or part of the company. The unidentified party is General Electric Co., which sought Dell’s financial services division, a person with knowledge of the matter said.

Silver Lake raised its bid to $13.65 per share on Feb. 4. After meeting throughout the day, Dell’s board finalized the merger agreement, which included a go-shop period, and announced its plans the next morning.

Employment Agreement

During the go-shop process, Evercore Partners Inc. contacted 67 parties, including 19 potential strategic bidders, 18 financial sponsors and 30 others, including sovereign wealth funds. Four others expressed interest unsolicited. Altogether, 11 parties were open to a transaction, but only three -- Icahn, Blackstone and Strategic Party A -- submitted proposals by the end of the go-shop process on March 23. Two days later, the board said in a press release that it would support the merger agreement with Silver Lake while continuing negotiations with Blackstone and Icahn.

Michael Dell’s employment agreement with the Silver Lake group entails a stock-option grant with an aggregate exercise price of $150 million. The company didn’t give an estimate of the value of those options, which have a 10-year term. The company estimated last year that a 2011 10-year option grant to Dell was worth about one-third of the options’ exercise price. Applying that ratio to the Silver Lake award would value it at about $50 million.

Michael Dell has agreed to forfeit the options he currently owns in the company. The Silver Lake group may strike employment agreements with the company’s other top executives and let them invest in the new company, according to the filing.

Largest Shareholders

Blackstone is proposing a leveraged recapitalization transaction whereby investors could choose to get either all cash or equity, subject to a cap, if they want to stay invested in Dell. The shares would continue to be publicly traded.

The private equity firm, which has teamed with San Francisco-based buyout shop Francisco Partners (PEF3393) and New York- based venture firm Insight Venture Partners, said it plans to fund the transaction with a combination of equity and debt, in addition to Dell’s cash and equivalents. Blackstone said it held discussions with some of Dell’s largest shareholders and plans to invite them to join the transaction.

Icahn is offering shareholders 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 and T. Rowe Price Group Inc., the largest Dell investors after Michael Dell, would contribute their stakes and won’t receive a cash payment.

To contact the reporters on this story: David Carey in New York at dcarey13@bloomberg.net; Jeffrey McCracken in New York at jmccracken3@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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