Global software giant Microsoft will lend Dell $2 billion as part of a $24.4 billion deal that will see Dell, founded in 1984, de-listed from the Nasdaq bourse, as it seeks to focus on its transformation from a hardware shop to a cloud provider.
Michael Dell, who chairs the company he started at the age of 19 with $1 000 when he was a pre-med freshman at the University of Texas in Austin, is heading up the bid and in partnership with global technology investment firm Silver Lake.
The transaction will be financed through cash and equity from Michael Dell, a $2 billion loan from Microsoft, cash from investment funds affiliated with Silver Lake, cash from a fund affiliated with MSDC Management, and loans from three banks.
Microsoft's move is being seen as a bid to align itself with one of the premier server makers in the world as the game shifts to the cloud. The software giant, which could potentially swap the loan for equity, can afford the debt as it ended 2012 with total cash, cash equivalents and short-term investments worth $68.3 billion, of which is cash and cash equivalents of $6 billion.
Dell's buyout, which should be wrapped up by mid-year, fits into its strategy to move into the cloud, and is premised on the feeling that it is undervalued as a stock.
Cautious stockholders
Henry Blodget, a former tech analyst on Wall Street, writes in Business Insider that Dell is going private because it is in the midst of a five-year shift from making PCs, to a single-source provider of corporate cloud and security solutions, sort of like a mini HP.
"The company feels it has been making good progress on its transformation, but management is worried about meeting quarterly targets and other milestones that are slowing the transformation down. And the stock just keeps dropping. So Michael Dell and Silver Lake felt there was an opportunity to be bolder and more aggressive with Dell as a private company," says Blodget.
Michael Dell, also currently CEO, left his dorm room at the end of his freshman year to grow the business and, in 1985, the group built its first computer system, the Turbo PC, featuring an Intel 8088 processor running at 8MHz, a 10MB hard drive and a 5.25-inch floppy drive.
He says: "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.
"Dell has made solid progress executing this strategy over the past four years, but we recognise that it will still take more time, investment and patience, and I believe our efforts will be better supported by partnering with Silver Lake in our shared vision."
After the deal, Michael Dell, who has a 14% stake at the moment, will continue as chairman and CEO, and will also keep a "significant equity investment" as he will contribute his shares.
Blodget says the plan is to invest in its products, as well as research and development, to accelerate its transformation. The spending will temporarily crimp cash flow and profitability, which investors may have "freaked out" about, he adds.
"Dell's plan is to focus on selling its solutions to mid-market companies (~500 employees), not the gigantic Fortune 500 companies that are already well-served by IBM, HP, and other huge 'solutions' providers," says Blodget.
However, HP has been scathing about the deal, issuing a statement saying: "Dell has a very tough road ahead. The company faces an extended period of uncertainty and transition that will not be good for its customers.
"And with a significant debt load, Dell's ability to invest in new products and services will be extremely limited. Leveraged buyouts tend to leave existing customers and innovation at the curb. We believe Dell's customers will now be eager to explore alternatives, and HP plans to take full advantage of that opportunity."
House money
Dell ended the last financial year with $18.2 billion in cash and investments after turning over $16 billion in the fourth quarter and $62.1 billion for the full year.
Blodget points out that Silver Lake and Dell are borrowing around $17 billion - including the $2 billion from Microsoft - which requires about $7 billion in temporary equity. "So it seems highly likely... that Silver Lake and [Michael] Dell will pay themselves a big dividend to cover their cash investment."
Michael Dell says: "I am committed to this journey and I have put a substantial amount of my own capital at risk together with Silver Lake, a world-class investor with an outstanding reputation. We are committed to delivering an unmatched customer experience and excited to pursue the path ahead."
Shareholders will gain $13.65 in cash for each share, which is a premium of 25% on Dell's closing share price of $10.88 on 11 January, the last trading day before rumours of a possible deal, which was kicked off last August, were first published. Yesterday, Dell stock gained 1.13% to close at $13.42, but lost 0.15% in after-hours trade to drop to $13.40.
Working relationship
Blodget says Silver Lake "has a long history of investing in troubled tech companies, and it has posted excellent returns over the years. Silver Lake's target investment time horizon is about five years, which is about 100-times longer than the time horizon of the typical public-market investor."
In 2011, Microsoft and Silver Lake were among the companies that were looking at buying out Yahoo in a bid that was later halted.
Silver Lake and Microsoft have also both invested in Skype, after eBay sold a majority to an investor group that included Silver Lake for $1.9 billion in cash and a $125 million note in 2009. Two years later, Microsoft bought Skype for $8.5 billion.
Silver Lake manages about $14 billion in investments, which does or have included Skype and Zynga. Egon Durban, a Silver Lake managing partner, says the group looks forward to partnering with Dell and the investor group to "innovate, invest in long-term growth initiatives and accelerate the company's transformation strategy to become an integrated and diversified global IT solutions provider".
Vestact analyst Sasha Naryshkine says Microsoft is intrinsically linked to hardware, and the investment, which amounts to "chump change", is a move to align itself with a premier hardware manufacturer, in a similar way that Oracle bought Sun.
Naryshkine says Microsoft, which is "joined at the hip" to Dell, could convert the loan to equity, or be paid back in future. However, the loan will aid it to capture certainty from one of the world's premier server manufacturers.
As part of the deal, Dell will receive other offers for 45 days under a so-called "go-shop" period. Lead director Alex Mandl says the "go-shop process provides a real opportunity to determine if there are alternatives superior to the present offer from [Michael] Dell and Silver Lake".
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