5 February, 2013 /Woori BMO Group/ Dell has engaged in a $24.4 billion deal to take itself private, according to analysts at the wealth management company Woori BMO Group. This will be a daring step out of the harsh glare of Wall Street, as it aims to reinvent itself in a world where personal computers are no longer the major technology sector.
The buyout which was revealed on Tuesday and which will be by far the largest since the days of the recession is a major gamble. This will load Dell with $15 billion in additional debt and will do little to stop the forces that reshape the technological market and undermine the firm’s business.
Fifteen years ago Dell made huge profits from the direct selling of customised PCs to consumers. Six years ago it was the leading personal computer manufacturer worldwide. It is in 3rd place today, behind Hewlett-Packard and Lenovo, and slipping.
Dell’s share of an increasingly shrinking PC market fell from 16.6 percent six years ago to just 10.7 percent last year.
No-name Taiwan and China competitors are scraping earnings to razor-thin margins. Android smartphones and iPads are the best-selling and most money-making products, no longer Windows PCs and desktops.
So while a move to cloud storage has boosted competition for data centres — a chance for Dell to sell hardware — huge customers like Google and Facebook are cheaply installing their own equipment. The growth in cloud computing has also caused many companies to forgo purchasing new computers, focusing instead on leased time and software running on virtual computer networks.
Dell’s market share for servers has fallen to 22.2 percent of the 9.5 million servers shipped in 2011 by about one percentage point. In this section, the bigger problem is the burden on profit margins. Shaw Wu, an analyst with Sterne Agee, reports that operating margins on servers, previously below 15 percent, are currently “in high single digits relative to mid-single digits for PCs.” Servers are expected to see PC-like margins soon, he added.
Michael S. Dell is investing his share in the company and about $700 million of his fortune to be able to face such obstacles and turn around a firm he founded in his dormitory room at the University of Texas in 1984.
“Dell’s transition is well underway, but we know it will take more time, more effort and more flexibility,” Mr. Dell wrote Tuesday in a memo to staff. “I think we’re best aligned with investors that can have long-term funding to help Dell develop and drive the turnaround plan for the organization.”
Mr. Dell’s commitment ensures that if the owners support the offer, he will retain ownership of the firm. One of the most influential players in development firms, the private equity company Silver Lake, is investing over $1 billion in cash.
“After taking on an estimated $15 billion in debt, Mr. Dell and Silver Lake claim that the corporation will survive due to the cash already generated by its PC business,” reported Christian Harper, Woori BMO Group’s Director of EMEA Wealth Management.
And Microsoft has decided to lend 2 billion dollars to Dell, aiming to shore up one of its most significant corporate partners. Microsoft itself is under threat, with long-time distributors flirting with its rivals to its Windows operating system.
“Microsoft is committed to the long-term growth of the entire PC environment, and is investing aggressively in several ways to develop the environment for the future,” the tech giant said in a statement.
An analyst with Bernstein Securities, A. M. Sacconaghi calculated that the volume of interest Dell will incur is smaller than what it invested in stock dividends and equity repurchases. “This debt load is manageable,” he said, “as long as the PC cash flow hangs.”
People involved in the deal said buyers have planned for possible further declines in the PC market but plan to retain at least the position of the firm. Dell’s spending cash has been stable for four of the past five years, reaching $5.5 billion in the last fiscal year.
The transaction’s size evoked the frothy days of decision making before the financial crisis. This will be Dell’s largest buyout since the $26 billion acquisition of Hilton Hotels by the Blackstone Group in the summer of 2007. Yet few foresaw giant leveraged buyouts resurging. While the continued availability of low-cost financing makes such deals possible, financiers warn that Dell is a special case due to the large equity stake of the founder.
The deal is the largest test yet for Mr. Dell, 47, who has an estimated fortune of $16bn. He returned in 2007, after a three-year absence, as the company’s chief executive, vowing to restore his formation. His strategy cantered on expanding into the data centre and corporate software services market, marked by numerous acquisitions that cost billions of dollars.
It has yielded nothing, so far. In the last five years, Dell’s shares have fallen 31 percent, closing at $13.42 on Tuesday — below the $13.65 bid price of the buyout.
But the policy will remain largely in place until the management buyout is completed. Brian T. Gladden, Dell’s chief financial officer, said the company would soon slash its PC options and purchase more businesses interested in commercial computing for small to medium-sized firms.
While Mr. Dell has been lamenting the poor market price of his company for years, just last year his attempt to take it private began in earnest. The billionaire owns a house in Hawaii next to the homes of two famous executives in private equity, Kohlberg Kravis Roberts’ Egon Durban in Silver Lake and George R. Roberts, and began to explore the possibility of a partnership with them.
Mr. Dell formally approached the board by August with a proposal to take the private company, prompting directors to set up a special committee to study alternatives to a deal, these people said. One priority was to keep the process free of conflicts of interest to avoid potential legal challenges, including hiring JPMorgan Chase to advise and seeking other suitors from Evercore Partners.
“The committee considered ways of holding the company public, including borrowing capital to buy back shares, but decided that the most enticing alternative was the management buyout,” Andrew Williams, Director of Institutional Equity at Woori BMO Group reported.
Mr. Dell had aligned himself with Silver Lake, which he let handle virtually all of the board negotiations, these people said. Mr. Durban used his close ties with Steven Ballmer, the chief executive of Microsoft, and to whom he had sold the video chatting service Skype for $8.5 billion, to bring in Microsoft as a partner.
Microsoft was wary of getting involved, fearing fracturing relationships with other partners, according to a person briefed on its deliberations. The software company insisted on providing a loan instead of taking equity in the newly private Dell. Silver Lake also hired four banks to arrange the $15 billion in financing.
The two parties had the outline of a final plan by the time the contract negotiations leaked last month. Yet up until Monday night, Dell’s special board group, headed by Alex J. Mandl, fought with investors on price, asking for the highest possible bid.
There was a shortage of other prospective investors to line them together. The advisors to the committee had unsuccessfully contacted K.K.R. and TPG Capital, another major investment group, seeking to root out another bid. And no competitive buyer has surfaced as a competitor following last month’s talk.
Secrecy was important. Mr. Dell was known in talks as “Mr. Denali” — a nickname he liked so much he referred to himself by it regularly — while the PC maker was “Osprey” and Silver Lake was “Salamander.”