Dell in $24 Billion Deal to Go Private

http://dealbook.nytimes.com/2013/02/05/dell-sets-23-8-billion-deal-to-go-private/

by chaz • 13 years ago

146 132 13 years ago

dealbook.nytimes.com

While not huge in the grand scheme of things, Dell has probably been the biggest vendor of Ubuntu machines, mostly in India and other poor countries. For $2 billion Microsoft gets to tell them to kill any such Ubuntu or Android product line-ups, and any research involving them. How is this good for Dell itself as a company, especially with the Windows/PC market going down? Is Dell really letting Microsoft turn them into another Nokia?

barredo• 13 years ago

Wouldn't Microsoft need a majority in the board to do so?

slav2• 13 years ago

Exactly! For $2bn out of $24bn they can talk but not much more.

jnsaff2• 13 years ago

I think that's not really what microsoft is after.

But if so, would the other board members care either way about Ubuntu/Linux?

And even if they do they could give in on this to get something else.

JumpCrisscross8• 13 years ago

Non-core international divisions are more likely to be spun out than killed for nefarious purposes.

yread• 13 years ago

How do you even know that's going to happen? MS has invested in Facebook and that didn't lead to them replacing PHP and Linux with Windows and C#

davidw3• 13 years ago

I've used Dells for a number of years and been pretty happy, but this does have me a bit worried. I was really pleased the one time I did have a problem, while living in Austria, with a machine I'd bought in the US: very quick service and no hassles to fix it, so the fact that it's a big, global company turned out to be pretty positive. I'm not sure who else I'd go with...

More than anything, I'm amazed and dismayed that tablets are far surpassing the screens they put on laptops these days: http://www.google.com/nexus/10/ - why won't anyone who's not Apple make a decent screen?! They've gotten worse, as my current machine does 1920x1200, and you can't find those anymore.

rednukleus• 13 years ago

The problem is that Windows 7 and prior don't handle high DPI screens too well - the UI elements come out too small.

Windows 8 does have better handling for high DPI screens, so hopefully we will see some higher resolution screens coming out over the next year.

bhauer• 13 years ago

Agreed. Modern laptop and desktop monitors are shameful regressions in technology. I very strongly believe that a large portion of any real or perceived market weakness of PC manufacturers can be traced to an utter failure to innovate in displays.

I also blame the "HD" moniker. My rant on HD: http://tiamat.tsotech.com/hd-sucks

runako3• 13 years ago

>> why won't anyone who's not Apple make a decent screen?!

The perception in the non-Apple segment of the market is that the customers will not bear the increased cost.

bjustin• 13 years ago

You need margin breathing room for a major component cost increase, which most hardware companies don't have. Plus you want to start small, so you can minimize panel area lost to defects. When you have big margins like Apple has on iOS devices, you can afford a small hit ramping up expensive tech high high DPI displays. Prices come down over time and yields go up, so you can make larger (iPad) and larger (retina MBP) high resolution panels taking advantage of your equipment and experience making small panels.

Other companies are catching up (have caught up?), but relatively poor scaling in Windows 7 made it more difficult. Windows 8 still has the same scaling issue for desktop apps.

thetrb• 13 years ago

Well, they just released the XPS 13 with a 1920x1080 display: http://www.slashgear.com/dell-xps-13-ultrabook-full-hd-editi...

xradionut• 13 years ago

You can get 100% OSS virtual machines through MS Azure. There's a whole division set aside to pimp the MS cloud to folks that don't do MS software.

(As an aside, my Dell laptop runs Ubuntu and keeps the Windows OSes caged in VMs... :) )

cooldeal• 13 years ago

> Dell has probably been the biggest vendor of Ubuntu machines, mostly in India and other poor countries. For $2 billion Microsoft gets to tell them to kill any such Ubuntu or Android product line-ups, and any research involving them

In my experience, the vast majority of such devices are wiped and loaded with pirated Windows.

amalag• 13 years ago

There is no good software in India and other countries for Linux. If you want to run business accounting software, you have to run Windows. And there the prices are so high for Windows and there is no enforcement, so they pirate. They do crackdown on things like Autocad for architects and animation software pretty hard though.

mseebach• 13 years ago

It's unlikely - if the Ubuntu activities at Dell turn a profit, Microsoft will have to make a convincing case that not being Windows-exclusive is somehow detrimental to longterm strategy, and that's going to be a tough sell. Dell is one of (the only?) major player with an offering to a new (and very influential) market.

Nokia is different - Microsoft wasn't displacing a successful smartphone business, they bailed out a massive clusterfk. Maemo was promising, sure, but in no way profitable. Basically, Nokia wasn't in a place financially to make a long bet on a new player in the smartphone OS market - Microsoft was.

niggler• 13 years ago

From 2000 high of roughly $56/sh to a final price of $13.65

magicmarkker2• 13 years ago

Anyone know what this means for shareholders?

magicmarkker2• 13 years ago

ah nvm it says Microsoft, will pay $13.65 a share

sootzoo3• 13 years ago

More specifically, Microsoft is loaning $2 billion to the consortium of interests buying Dell, as is Michael Dell (~$3.5B) and Silver Lake (~$1B).

slav2• 13 years ago

I guess they get $13.65 per share in cash and that's it

sootzoo3• 13 years ago

Silver Lake is buying for $13.65 a share:

> Under the terms of the deal, the buyers' consortium, which also includes Microsoft, will pay $13.65 a share in cash.

So the stock probably won't sell above that number, but won't be far off from it until the deal closes. Since it's a cash deal, after the deal closes you'll probably be compensated with cash (your shares would disappear from your brokerage account and you'd gain the equivalent cash value).

Ao7bei3s3• 13 years ago

What if I don't want to sell my shares for $13.65 but hang on to them? Can Silver Lake just set a $13.65 value and force me to sell at that value to them?!

(Assuming I had shares, which I don't.)

JumpCrisscross8• 13 years ago

A cash payout representing a 25% premium to the price before news of the deal leaked earlier this month.

mmahemoff• 13 years ago

There's a lot of big words without substance in these quotes, but the most meaningful part is that Dell's transforming to be a "global IT solutions provider".

So the usual "it worked for IBM" strategy most hardware and infrastructure companies ends up with when sales go south, with mixed results.

JumpCrisscross8• 13 years ago

This is one the largest LBOs in history, the largest since the financial crisis, and an audacious in swimming upstream against technological trends. There is still a 45-day go-shop period during which Dell will entertain competing bids, though without Mr. Dell's stake this is unlikely.

The deal structure is interesting, with Silver Lake contributing cash, Microsoft a $2 billion loan, and Mr. Dell simply rolling over his stake (though his fund, MSD Capital, will contribute some cash, too). The rest is debt financing from Barclays, Credit Suisse, Bank of America, and Royal Bank of Canada.

DeepDuh• 13 years ago

Microsoft still seems to have a thing for saving struggling computer companies. Will this one bite them later too?

Uchikoma• 13 years ago

Like their (hidden) takeover of Nokia (money + people).

neilxdsouza• 13 years ago

Apple is into Hardware and Software, Oracle is now into Hardware. Some exec at MSFT has seen how good a user experience you can give if you control the entire cycle from hardware to software.

If they entered the Hardware market directly, they compromise Windows - for example companies would distribute Linux with their machines more openly and they could lose the "XXX recommends WinX". So they could do this indirectly by owning Dell privately and pulling the puppet strings.

Secondly if you want to run a massively parallel search engine like bing - you need a lot of hardware. They would probably seat a specialised hardware team at Dell and take the machines at cost.

mikecsh2• 13 years ago

Can anyone explain in basic terms how shareholders can be forced to sell their shares back?

chollida13• 13 years ago

For the most part they can't.

That's why this deal came out at a 25% bump over where the share price was when the deal was announced. This bump is intended to entice shareholders to vote for it.

From the shareholders perspective DELL US Equity has been in a downward slide for the past year and only rebounded with this news, so if they don't take the deal then they can probably expect the share price to fall from almost 14 back to under 10 pretty much instantly.

To prevent a very small minority from stopping the will of a large majority once the deal has an overwellimng majority( I think its 95% but I might be wrong on the exact value), they can then force the remainder to take the deal.

This might seem like a bad deal for the hold outs but if this type of provision wasn't' enabled then no company could ever go private as there would always be that one person who holds onto a single share just to be a pain in the ass:)

pwang• 13 years ago

In fact, this "last stakeholder" problem is one of the game theoretic reasons for things like eminent domain.

arjunnarayan• 13 years ago

Shareholders aren't being forced: theoretically the board represents the shareholders, and the board voted to accept the deal (and with a 25% premium on price, I would too, if I was on the board). In a sense if you are a shareholder who doesn't like this deal, you should have made that clear to your board members (or voted for different board members who shared your views) before.

alberth2• 13 years ago

>> "Michael S. Dell will contribute his stake [of DELL] of roughly 14 percent toward the transaction..."

How does this work exactly?

Does this mean that Dell will no longer be an equity owner in the new private company and he's surrendering all his equity?

Or is Michael Dell simply saying, as long as I get to keep 14% of this new private entity, you don't have to pay me out on this deal to go private.

JumpCrisscross8• 13 years ago

The second one, Michael Dell is essentially taking equity in the surviving private entity in lieu of $13.65/sh.

bluedevil2k5• 13 years ago

Wrong again. There's tax implications that prevent him from just surrendering his shares in the company in exchange for a large equity position in a private company.

chollida13• 13 years ago

He's basically saying he's voting for the transaction to go through. He'll still have his ownership.

justincormack2• 13 years ago

No its not quite that he is not getting the cash deal that other investors are so it must be more complex. You are not allowed to favour some shareholders over others.

ohwp2• 13 years ago

I've been following Apple stock lately. To me It seems that stock has almost no relation with the company anymore. It's a game of buy and sell that is dangerous for a company. Apple lost a load of money within hours. I don't think there will ever be a company which is flexible enough to handle changes in value that fast.

So I think this is good for Dell. Breaking free of shareholders who just play the money game.

glhaynes• 13 years ago

Not sure what you mean when you refer to a company being flexible enough (or not) to handle fast changes in valuation — I wouldn't imagine there has been any significant change to Apple's operations or strategy during their recent stock price movement.

ohwp2• 13 years ago

Well lets say a company is planning a big investment and suddenly stock value dropped like stone. I think that can be very dangerous because suddenly you have to rethink your strategy.

msandford3• 13 years ago

Could someone help Michael Dell buy a properly fitting suit? The guy looks like a gorilla with the cuffs nearly covering his hands. I'm not saying he needs a $10k Savile Row cut-to-fit but it'd be nice if the guy talking about a $24 billion dollar deal doesn't look like he bought a suit off the rack at JC Penny's.

mdesq• 13 years ago

At least it's not a hoodie.

lifeisstillgood• 13 years ago

This is weird - if Dell was a woman, everyone would comment on his (her) ill-fitting two-piece. But this is either a nice balancing of the sexism divide we have seen recently, or its bike-shedding.

I suspect that bike-shedding is the major issue.

msandford3• 13 years ago

I don't really care what he wears. But the fact that he wears a suit means he feels it's important, and the fact that it's very bad means either he or someone who works for him has atrocious attention to detail.

If you are going to wear a suit, wear one properly.

He would be ahead (at least in my mind, not that my opinion matters) if he just wore properly fitting slacks and a polo vs an ill fitting suit. He'd be better off wearing a hoodie and jeans too because at least then we know he doesn't have any respect for the idea of "dress is important"

EDIT: Fixed spelling

Ao7bei3s3• 13 years ago

Why? (serious question; I really don't understand why that would be important to you or anyone)

msandford3• 13 years ago

It reflects poorly on him. With Zuckerberg we know he has no respect for the Wall Street orthodoxy because he steadfastly refuses to wear a suit. I don't care for him personally but I respect the position he seems to be taking.

But Dell is wearing a suit which means that he in some way feels it's necessary to do so. But he does such a bad job of it that even a glance makes it obvious he doesn't know what he's doing. Or the person he paid to get him a suit did a horrible job. Given that he's "running" a $24 billion dollar company I would like to see better attention to detail on a thing that he must think is important, as evidenced by his wearing a suit.

joonix2• 13 years ago

Who cares? Does the ability to buy a tailored suit correlate positively with investment acumen? If a speaker's appearance convinces you to invest your money, you're a sucker.

coob• 13 years ago

Can someone help me understand: If the deal has been announced at $13.65 why are shares still trading lower?

tvladeck• 13 years ago

Because there is a small chance that the deal will not close. So the shares today are worth close to that, but not quite.

wtvanhest3• 13 years ago

The deal is not guaranteed to close. Merger Arbitrage funds help support the price, but most stock holders are happy exiting with the upside they just gained while not risking a few pennies per share on the possibility of the deal not closing.

This is common price action during M&A.

JumpCrisscross8• 13 years ago

(1) Time value of money. Shareholders aren't getting $13.65 today. If DELL traded at $13.65, I could short it and earn a risk-free yield on the short proceeds between now and when the payout is made.

(2) Merger risk. Did I say risk-free? I lied. Deals fall apart for reasons ranging from shareholder litigation to antitrust issues to Michael Dell getting pissed off because his socks got wet. The difference between the forward stock price (stock minus time value) and payout is the expected probability of the deal closing.

Disclaimer: I have an outstanding position in DELL.

bluedevil2k5• 13 years ago

What?? If you short it at today's price of $13.39 and then are forced to buy it to cover your short at $13.65, you're going to lose money.

bluedevil2k5• 13 years ago

To explain the Merger Arbitrage a little more with actual numbers. If you're a Dell shareholder today, you can sell the shares right now at $13.38. This is a $0.27 discount (2.0%) to the agreed upon buy-out price. The shareholders today are willing to give up that 2% in additional gain, because the risk to them is that the sale falls through, and the price of DELL will fall back to the pre-buyout price of around $9.97 (early January price). That would be a 25% loss. Giving up the potential for 2% in gains in exchange for eliminating the risk of 25% loss? A good investment for most average investors.

Why do the institutional investors make this bet - they have advantages that average investors don't. Leverage (they're making this bet with other people's money), options (limited downside risk), or the skeptic may even say, insider information.

jusben13694• 13 years ago

Post dot come melt down the rules and requirements around financial reporting were substantially strengthened. Some of that was a good thing but in general it was an over reach. C level people now signed their names and risked prosecution. The way revenue was recognized became so conservative as to be nonsensical in many cases. The costs layered on to manage this became significant. In short, it became more and more difficult to innovate if you were a public company due to the costs and potential backlash from public markets.

Facebook is a victim of this on one end. They delayed their IPO as long as they could as Zuckerberg loathed what having to please outside investors would do to the nimbleness he requires. They then waited too long and so are now trying to excite the markets with a company that's already past its most exciting part of the growth curb. Add to that obvious greed and ego in terms of pricing as high as possible and you have a huge web blanket thrown on the ability for other tech companies to IPO.

Dell is on the other end. They decided it was better to invest 6 months of their lives into going private so that they too could innovate for the longer term.

At the end of the day we've gone from the go-go days of the 90's where nearly any tech company would IPO to a point where very few IPO either because they can't or don't want to. That will fundamentally change how companies are funded going forward and will likely impact the amount of returns being generated at the critical (for VC's) end of the funnel. My hope is that public markets realize this and begin to roll back some of the more arduous regulations.

rrrrtttt3• 13 years ago

I don't think Dell is going to innovate post-LBO. It's going to be saddled with debt, most of it bank debt. The new owners are going to sell off all activities that don't generate cash and milk the remaining parts until the debt is paid off.

An LBO is basically a gamble that there is a cash cow under all the fat, and once the fat is trimmed investors will see the company's true value.

kordless• 13 years ago

I think there is a huge opportunity for Dell in the private cloud space. They may not innovate on technology, but they could certainly innovate with new business models using emerging technologies like OpenStack.

jusben13694• 13 years ago

I think that's a fairly cynical response. Dell (Michael) is worth a huge amount. He has a very large stake and isn't doing this to milk his company. Whether he's successful or not is another question but it's certainly no cynical milking exercise. Now he can dig deep, not worry about earnings for the next 12 months, and tackle new opportunities.

refurb• 13 years ago

That's a very odd claim. Lexmark came about when an LBO was used to acquire IBM's printer division.

It did pretty well, no?

hkmurakami• 13 years ago

If there was ever a time when a company was going to be "okay" under massive amounts of debt, it's in today's interest rate climate where companies can borrow money for very little compared to previous eras.

wildgift3• 13 years ago

so, are you saying you want to have another dotcom stock bubble?

jusben13694• 13 years ago

I'm not a fan of the type of discourse that believes things are either black or white and can't imagine a shade of gray.

easyfrag• 13 years ago

But is Dell doing this to get away from the financial reporting required of public companies or to get away from the expectations of short-term traders who want growth at all costs?

illuminate• 13 years ago

The latter, I would hope.

glesica2• 13 years ago

But what exactly is good about a large number of IPOs? It will change how companies are funded, but why do you assume things will be worse? It seems to me that a somewhat more thoughtful system of investing might be a good thing.

In some sense, taking a company public is cheating because public markets are easy to manipulate, just look at the Facebook IPO (note, I'm not saying Facebook broke the law, just that they built up hype in a way that would not have been possible in private markets). Facebook didn't actually have to convince any VCs that it could turn a profit. It just had to convince VCs that it could have a successful IPO. There's a subtle, but important difference there.

jusben13694• 13 years ago

Hey Glesica. I think you hit the nail on the head with your 2nd last sentence. "It just had to convince VCs that it could have a successful IPO." If VC's think IPO's are less and less realistic as an exit strategy then the other major event will be acquisition exits. That will narrow the funnel of deals they'll be involved in to those that feel like they have a good chance of being acquired. To have a good chance of being acquired you'll need to get onto the radar of one from a handful of companies who have the pockets to do that (Oracle, Facebook, Microsoft - not really Apple as they right now don't do large acquisitions)

I saw your comment on manipulating public markets and see it referenced below in a couple of places too by others. Honestly, Dell pulled his company private because he can't manipulate public markets. It's important to remember that. Zuckerberg and FB have gone from wunderkind to potential "loser" status when moving from private to public markets.

rayiner• 13 years ago

The regulation was more a response to Enron, Tyco, etc, not the dot com collapse.

3327• 13 years ago

is the hacker news?

Jabbles• 13 years ago

As a newly private company – now more firmly under the control of Mr. Dell

Can someone explain what, exactly, has been preventing the CEO and founder of the company from doing what he thinks is best. Is it just the threat of being fired (like Steve Jobs)? By the "board"? Will that threat disappear?

bluedevil2k5• 13 years ago

The Board prevents that, as well as American corporate law. The American corporation is a series of checks and balances - the Board checks the CEO. Dell is in a unique position because Michael Dell owns so much of the company, 14%. It would have been difficult, next to impossible, to dismiss him from the Board. However, it would not have been as difficult to dismiss him from the title of CEO.

Even private companies have a Board, so the same situation exists today. Likely just new people on the Board, along with Michael Dell.

rrrrtttt3• 13 years ago

So actually Dell is going to have much less control of the company than he has now. Shareholders are patsies and CEOs are the guys who effectively control the board. Now that the company goes private he's going to answer to his lenders, and these guys are tough.

bluedevil2k5• 13 years ago

I'd imagine a guy who built a company into the size of Dell, and is personally the 41st richest man in the world, is tough as well.

Swannie4• 13 years ago

He gets to move to a longer term view than the next quarters numbers.

loumf• 13 years ago

This and other items that Wall St. cares about, but aren't necessarily in the best long-term interest of the comapany.

For example, they can now have less of a focus on margin. It's the constant quest for margin that had Dell outsource its whole company to Asus:

http://www.asymco.com/2012/12/07/the-real-threat-that-samsun...

ChuckMcM• 13 years ago

In my experience the difference between being a public company and a private company is all about dealing with stockholders; what you have to disclose and how folks react. A company the size of Dell will deal with at least one and usually several shareholder lawsuits a year if their stock is at all volatile, they will have Sarbanes-Oxley rules they will have to audit for, they have to answer in the news when their stock goes down, they have to explain every quarter what they did and didn't get done in the quarter.

As a private company they can do a much better job of controlling the impression the publish has of them, they are less distracted by shareholder concerns, and they have a small number of shareholders to answer to and be frank with.

For a company that is self sufficient (which is to say doesn't need to go to the public to raise funds for operations or expansion) it is a lot simpler. It has been stated that this is why Fry's Electronics never will go public.

natural2192• 13 years ago

Why wouldn't you just take the $24 billion and start a new company? Is Dell's goodwill really that valuable, are the supplier relationships that valuable? Or is it because of some legal non-compete reason?

DanWaterworth• 13 years ago

What would he call it?

ceejayoz• 13 years ago

Michael?

brudgers• 13 years ago

Dell has total assets of $44.43 billion. This makes Michael Dell's 14% stake worth more than $6 billion. That's what he's putting up. It is hard to see competing with himself as a reasonable course of action - even more so given that he would not be able to put his investment in Dell toward a new venture.

In other words, the $24 billion is there by virtue of the company being Dell and Michael Dell's participation.

JumpCrisscross8• 13 years ago

Let's take out the $11.3 billion of cash and short-term investments on Dell's last quarterly balance sheet [1]. Yes, a lot of this being overseas, but that's much less problem for a private company than a public one. So we're really paying $13.1 billion for the assets.

Assets which in 2012 produced a 7.3% un-levered ROA (earnings before interest after taxes / assets) and are levered only 5x (assets / equity) in historically low rates (Lenovo is 6.7x). Not to say this is anything close to a slam dunk. But the pressure of working to make the next interest payment isn't so dissimilar from slaving to your next fund-raise.

Note the difference between capital and money, assets and liabilities, stuff and claims. Companies are arrangements of capital, physical and intellectual. If the value of that arrangement is zero or negative one liquidates, i.e. shuffles the capital around without changing its value while marking down the claims to show the presumed valuable arrangement has vaporised. The inverse of liquidation is entrepreneurship, i.e. shuffling capital into an arrangement of value. When this is successful the claims are marked up to reflect the arrangement's value.

Capital has inertia - shuffling it around takes energy, e.g. recruiting costs for intellectual capital. ABCD -> AB + C + D takes less effort than E + F + G + H -> EFGH. We only liquidate when there is nobody willing to pay for the arrangement. Similarly, we only build when there is nobody selling it.

[1] http://www.sec.gov/Archives/edgar/data/826083/00008260831200...

natural2192• 13 years ago

Thank you for the thorough and understandable answer. I realize my question was naive, but I just didn't anticipate that Dell had such a considerably low price-to-assets ratio (okay, I made this ratio up. I'm obviously not a finance guy). I assumed that at least a big part of the buyout would be a premium on top of the revenue-generating assets, and I was wondering what factors might drive that premium up. Your last point seems to answer that question sufficiently.

Yzupnick• 13 years ago

Can't the reversed be asked as well? "Why start a brand new company for $24 billion, can't they just buy Dell? Is the culture/supply chain/infrastructure so bad that it has to be scrapped and completely redone?"

I would guess that Michael Dell is betting on the fact it is easier to change the bad parts of Dell, than it is to completely re-build all the good parts.

ck2• 13 years ago

Are they trying to bain-ify the company? Or am I misunderstanding?

Tloewald• 13 years ago

At least Michael Dell is putting his money where his mouth is and giving the money back to shareholders.

lostlogin• 13 years ago

Here it is, surprised this popped up so late in the piece.

johnohara• 13 years ago

In 2009, in Davos, Vladimir Putin's response to Michael Dell's question provided a glimpse into the long term challenges faced by Dell and others (IBM, HP, etc).

http://www.youtube.com/watch?v=OMR1BZ9aYM8 (first 6 minutes)

The BRIC nations are competing and it's showing.

IBM has sold its PC division to Lenovo, HP flirts on and off with exiting, and Dell has declared itself a services company.

Another insight is the sheer number of desktop computers up for sale on CraigsList and the staggering number of pallets of used equipment up for auction. They're metaphors for the shift/restructuring currently taking place. Those systems aren't necessarily being replaced. Many of them represent desktops used in jobs that no longer exist.

Dell in $24 Billion Deal to Go Private

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