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Lester Goh
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Singapore-based polytechnic student looking to break into the buy-side. Email: lester_py@hotmail.com  Disclaimer: The author's reports contain factual statements and opinions. He derives factual statements from sources which he believes are accurate, but neither they nor the author represent... More
  • Dell LBO Part 1: One Of The Largest LBOs Since The Financial Crisis 0 comments
    Mar 21, 2014 1:50 PM | about stocks: HPQ, ORCL, IBM, DELL

    Dell LBO Part 1 - One of the Largest LBOs since the Financial Crisis

    In this multiple-part article, I will analyze the LBO of Dell Inc., a computer-maker that was recently taken private in 2013 by a consortium of investors, namely Michael Dell, the founder, and Silver Lake at a price of $13.75 a share, valuing the computer-maker at a whopping $24.4b. A special dividend of 13 cents per share was also offered.

    Besides being one of the largest LBOs since the 2007, the Dell LBO is also controversial as a few days after the announcement of the deal, Southeastern Asset Management released a letter arguing that Dell was not worth $13.65 per share, but was instead worth $24 a per share, valuing the company over $40b.

    Who is right? Southeastern Asset Management or Michael Dell & Silver Lake? Is Michael Dell deliberately trying to undercut the company that he was CEO of for so many years in an attempt to regain control at a bargain price?

    To declare who is right, we must first value Dell Inc.

    I will be using two forms of valuation which are the most popular and widely-used in the industry, namely -

    1) Comparable Company Analysis ("trading comps")

    2) Discounted-Cash Flow Analysis ("DCF")

    Comparable Company Analysis

    Analyzing trading comps is a widely-used valuation methodology that is premised on the theory that companies operating in similar markets and sell similar products should be valued similarly as these companies face the same business risks, market risks, et cetera.

    Hence, by looking at how Dell's peers are valued, we can extrapolate a "fair" valuation for Dell.

    Choosing the Comparables Universe

    Due to the nature of this analysis, it is of vital importance to choose an appropriate comparables universe of companies in order to ensure the accuracy of the analysis.

    For my analysis, I have chosen Hewlett-Packard, IBM and Oracle Corporation as Dell's competitors, due to them serving similar markets (consumer / corporate) and having similar products (servers, networking, etc) as compared to Dell.

    Now, I will analysis the valuation multiples for these companies. The multiples that I will be analyzing includes, but is not excluded to, Enterprise Value (NYSE:EV) / Sales, EV / EBIT, EV / EBITDA and P/E.

    In my analysis, I did not bother to confuse you by calendarizing historical financials for the companies as I found it had little effect on the end results.

    Originally, I had included IBM and Oracle Corporation in my analysis. However, during my analysis, I found out that Oracle and IBM had extremely different valuation multiples as compared to Dell and Hewlett-Packard (if Dell's valuation multiples were similar to IBM, it would be worth over $100b, if it were similar to Oracle, it would be worth over $200b, which is obviously incorrect), and hence they were obviously not good comparables, and thus have been eliminated in this analysis.

    Ergo, this analysis will only focus on Dell and Hewlett-Packard.

    First, let us analyze Dell's EV / Sales compared to HPQ.

    (click to enlarge)

    As seen above, Dell's EV / Sales is in line with HPQ, and thus as compared to HPQ, Dell is somewhat correctly valued according to Michael Dell & Silver Lake, and way overvalued by Southeastern Asset Management by over $20b.

    (click to enlarge)

    (click to enlarge)

    (click to enlarge)

    As seen above, the same is true for EV / EBIT, EV / EBITDA, and P/E.

    Thus, I conclude that according to Comparable Company Analysis, Michael Dell & Silver Lake appears to have correctly valued Dell Inc.

    In my next article, I will value Dell using a different valuation methodology, known as the Discounted-Cash Flow Analysis ("DCF").

    My trading comps analysis on Excel is available here: onedrive.live.com/redir?resid=5A0DE9664C...

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: HPQ, ORCL, IBM, DELL
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