U.S. computer maker Dell Inc. announced Feb. 5 that the board accepted a $24 billion bid by CEO and founder Michael Dell to take the company private. Private Equity firm Silver Lake and Microsoft also form part of the consortium.
“I believe this transaction will open an exciting new chapter for Dell, our customers and team members. We can deliver immediate value to stockholders, while we continue the execution of our long-term strategy and focus on delivering best-in-class solutions to our customers as a private enterprise,” said Michael Dell.
Speculations about the largest private equity transaction since 2008 first emerged on January 14. The share price has since then risen roughly 25 percent to $13.42 Feb. 5. Michael Dell and Silver Lake are bidding $13.65 per share. The difference in price means the market is pricing in a small probability that the deal won’t go through.
The proposal includes the possibility for Dell to solicit a higher bid within 45 days, but analysts think that a higher bidder won’t turn up. “Despite the low valuation, we believe the emergence of a superior bid is highly unlikely given the idiosyncrasies of this deal where Michael Dell has a large equity stake (14 percent of the company) and also considering the $2 billion investment from Microsoft,” writes Deutsche Bank in a note.
Financing of Deal Complex
While it is clear that Michael Dell will take the lead in the leveraged buyout, the deal is complex in terms of financing.
According to the last proxy statement filed with the SEC in May 2012, Michael Dell owns 244,926,659 shares in the company, or 14.1 percent of the company. The stake is worth $3.34 billion at the bid price of $13.65. In addition, Forbes ranks Michael Dell at number 22 of the richest Americans with a net worth of $14.6 billion including his Dell shares.
“I have put a substantial amount of my own capital at risk,” says Dell who will draw on his own fortune to fund the acquisition. His cash is managed through MSD Capital LP, a New York based investment firm, which exclusively works for Dell.
As of September 30, 2012, MSD capital only had investments in public equities of $561 million, according to a SEC filing. The rest is tied up in private equity, real estate, special opportunity investments, or with other investment management firms. None of these other holdings need to be disclosed, but there will be enough cash on hand to supplement the deal. MSD declined to comment on the transaction.
I have put a substantial amount of my own capital at risk.
Private equity firm Silver Lake will also fund a substantial part of the transaction. “Silver Lake Partners seeks to achieve superior risk-adjusted returns by investing with the strategic insight of an experienced industry participant, the operating skill of a world-class management team, and the investing capabilities of a leading private equity firm,” it says on the company’s website. Given the firm manages a total of $14 billion in assets, it is unlikely that it could commit much more than $1 billion.
Microsoft will contribute a $2 billion loan to the endeavor and therefore will not take any management responsibility. “As always, we will continue to look for opportunities to support partners who are committed to innovating and driving business for their devices and services built on the Microsoft platform,” the company said in a press release.
The rest of the financing will be in the form of loans by Bank of America, Barclays, Credit Suisse and RBC Capital Markets.
Good Price for Turnaround Stock
“It appears the investor group will acquire DELL at an exceptionally attractive valuation. Specifically, at $13.65, DELL is valued at … a discount to other structurally challenged companies like Hewlett Packard and Lexmark,” writes Deutsche Bank.
Citigroup also believes that Dell is “fundamentally challenged,” but usually, turnarounds can be easier engineered by private companies. They do not need to disclose quarterly performance figures and issue high dividends. In addition, Michael Dell acquired strategic expertise and partners with Silver Lake and Microsoft.
The good news is that Dell has strong cash flows and the cost of capital will be substantially reduced. By moving away from public equity funding to relatively low yielding loans, the company can use some of that cash flow to fund necessary restructuring.
Taken public in 1988 as Dell Computer Corporation, the company re-branded itself simply as Dell Inc. in 2003. Dell experience rapid growth and was the largest PC manufacturer in the United States for most of the time between 1999 to 2006, when it lost the lead to HP.
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