On February 5th 2013, Dell (DELL) had announced that it had received an offer from a group of investors to buy out the firm at $24.4 billion. That would turn out to be $13.65 a share. This is old news. However, as March 22nd, the date set by its board to seek superior offers from the market approaches, more and more players have started entering the field of play.
Unlike other leverage buy-outs, which are made to remove the incumbent management, bringing better efficiency and unlocking potential hidden value for investors, this leverage buy out is being carried out by the CEO, president, founder and the largest shareholder of Dell - Michael Dell. The primary reason behind going private is that Dell stock has been falling consistently in the previous year. It had fallen to almost $10 at one point from the high of $18.
For the year 2012, HP had a market share of 16.7%, Lenovo had a market share of 15.7% while Dell had only 10.6% market share. Dell was the market leader in 2006 and its market share had fallen below 12% for the first time in past 6 years. Dell, from once having a market capitalization of $100 billion, now has market capitalization of only $20 billion.
Michael Dell has been criticized in some quarters for not being able to lead the company well through the changing times, and comparisons have been made with the downturn in the fortunes of Apple (AAPL). There is a feeling that with the company being private, Michael Dell may be able to take long-term decisions for the company, while taking a short-term hit on revenues. For example, he may need to cut down the PC sales business, while concentrating on the business services business.
The company states in its 10-K that its cash balances are held in numerous locations throughout the world, and most of these locations are outside the U.S. If the cash is repatriated as of now, it will be taxed at U.S. corporate tax rate. However, in a leveraged buyout scenario, since the interest is tax free, the money can be brought into the country at a much more efficient tax rate. Dell has a total of approximately $13 billion in cash and equivalents.
Opposition and alternatives
The deal offered to the board from Michael Dell has faced severe criticism from various investors. One of the major shareholders, Southeastern Asset Management, has written to the board not only opposing the current offer but also suggesting various alternatives to unlock value for shareholders. Southeastern Asset Management holds 8.5% in the company, and its detailed valuation shows that a conservative value per share of Dell should be around $24.00.
In early March, Carl Icahn had emailed the board suggesting that the company borrow money to issue a special dividend of $9 per share. He is valuing the company at $23 per share (including the $9 dividend). Carl Icahn has also threatened the board with years of litigation, and will call on a vote to re-elect the company's directors if the board goes ahead with Michael Dell's current offer. Most importantly, on Monday, there were reports indicating that Blackstone Group LP (BX) is seriously weighing a bid for the company. This will put further pressure on Michael Dell to increase his offer further.
Microsoft's role in the deal
Michael Dell will pledge his 16% stake in the deal, which is valued at approximately $3.7 billion, and is also going to further invest approximately $700 million. Silver Lake Partners, a private equity firm is going to invest $1 billion in the deal and a further $15 billion are to be arranged from the banks as debt. Most importantly, Microsoft (MSFT) has loaned $2 billion for the deal. Microsoft has said to have opted out from getting equity in the deal, as it did not want to upset other PC manufacturers which use Windows as its platform, by trying to favor one customer.
This is a strategic investment on Microsoft's part. Whether the deal goes through or not, Microsoft is certain that Dell is going to tie up with it in future and use Windows as the platform for its PCs. Other such recent strategic investments of Microsoft include stakes in Facebook (FB) and investment in a subsidiary of Barnes & Noble Inc (BKS) which focuses on tablets and e-books.
Hewlett-Packard, Dell's closest competitor, has meanwhile issued a statement saying that it plans to take full advantage of Dell's buy-out scenario and try to poach its customers which may be looking to avoid the uncertainty surrounding Dell. Both HP and Dell are customers of Microsoft.
The stock of Dell was trading in the regions of $10 - $11 when the reports of the buyout had surfaced. Since then the stock had jumped to $13 and then gradually to $14. Thus, the investors and the market seem to have a feeling that the final deal, if it happens, will happen at a much higher price than what is currently being offered by Michael Dell and his group. With investors such as Carl Icahn and Southeastern Asset Management, the investors will most probably be able to get more than $15 at least, if the deal goes through.
Even if the deal ultimately does not go through, this buy-out has thrown open various options for the company to unlock investor value, like issuing a special dividend with a loan. Dell has a wonderful distribution network across the world, and there are opportunities for it to grow in servers, data storage and business services business. This certainly seems to be a good time to be Dell's shareholder.