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.
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.
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.
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.
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.
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?
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.
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.
> 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.
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.
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.
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.
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?
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?
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.
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.
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.
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?
(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.
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.
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.
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:)
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.
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.
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.
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).
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.
[+] [-] JumpCrisscross|13 years ago|reply
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|reply
[+] [-] neilxdsouza|13 years ago|reply
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.
[+] [-] msandford|13 years ago|reply
[+] [-] lifeisstillgood|13 years ago|reply
I suspect that bike-shedding is the major issue.
[+] [-] mdesq|13 years ago|reply
[+] [-] Ao7bei3s|13 years ago|reply
[+] [-] joonix|13 years ago|reply
[+] [-] spqr|13 years ago|reply
[deleted]
[+] [-] nextparadigms|13 years ago|reply
[+] [-] davidw|13 years ago|reply
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.
[+] [-] xradionut|13 years ago|reply
(As an aside, my Dell laptop runs Ubuntu and keeps the Windows OSes caged in VMs... :) )
[+] [-] yread|13 years ago|reply
[+] [-] mseebach|13 years ago|reply
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.
[+] [-] JumpCrisscross|13 years ago|reply
[+] [-] barredo|13 years ago|reply
[+] [-] cooldeal|13 years ago|reply
In my experience, the vast majority of such devices are wiped and loaded with pirated Windows.
[+] [-] jusben1369|13 years ago|reply
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.
[+] [-] rrrrtttt|13 years ago|reply
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.
[+] [-] glesica|13 years ago|reply
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.
[+] [-] rayiner|13 years ago|reply
[+] [-] easyfrag|13 years ago|reply
[+] [-] wildgift|13 years ago|reply
[+] [-] natural219|13 years ago|reply
[+] [-] JumpCrisscross|13 years ago|reply
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...
[+] [-] Yzupnick|13 years ago|reply
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.
[+] [-] brudgers|13 years ago|reply
In other words, the $24 billion is there by virtue of the company being Dell and Michael Dell's participation.
[+] [-] DanWaterworth|13 years ago|reply
[+] [-] Jabbles|13 years ago|reply
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?
[+] [-] coob|13 years ago|reply
[+] [-] JumpCrisscross|13 years ago|reply
(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.
[+] [-] bluedevil2k|13 years ago|reply
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.
[+] [-] alberth|13 years ago|reply
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.
[+] [-] JumpCrisscross|13 years ago|reply
[+] [-] chollida1|13 years ago|reply
[+] [-] mmahemoff|13 years ago|reply
So the usual "it worked for IBM" strategy most hardware and infrastructure companies ends up with when sales go south, with mixed results.
[+] [-] mikecsh|13 years ago|reply
[+] [-] chollida1|13 years ago|reply
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:)
[+] [-] arjunnarayan|13 years ago|reply
[+] [-] ohwp|13 years ago|reply
So I think this is good for Dell. Breaking free of shareholders who just play the money game.
[+] [-] glhaynes|13 years ago|reply
[+] [-] johnohara|13 years ago|reply
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.
[+] [-] unknown|13 years ago|reply
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[+] [-] Tloewald|13 years ago|reply
[+] [-] lostlogin|13 years ago|reply
[+] [-] unknown|13 years ago|reply
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[+] [-] magicmarkker|13 years ago|reply
[+] [-] ck2|13 years ago|reply
[+] [-] niggler|13 years ago|reply
[+] [-] 3327|13 years ago|reply