On February 6, the company announced that Michael Dell had struck a deal to take the company private in the biggest leveraged buyout since the financial crisis, partnering with the Silver Lake private equity firm and Microsoft Corporation (NASDAQ:MSFT) to try to turn around the struggling computer company without Wall Street scrutiny. Michael Dell will contribute $500 million of his own cash, and MSDC Management – an affiliate of his investment vehicle, MSD Capital – will contribute another $250 million, towards the $24.4 billion purchase of Dell. It also said that it is targeting the repatriation of $7.4 billion of cash now parked abroad to help finance the deal. That may dismay some shareholders, as a hefty tax is usually levied on cash brought back from overseas.
There’s a lot of talk about the motives behind the deal. Some say Dell is doing it to escape the quarterly visit to the Wall Street “meat grinder,” where either you “meet (or exceed)” their expectations or get “ground into a fine slurry.” Going private frees Dell of public reporting requirements and gives it more latitude to acquire, divest, or otherwise remodel the business.
Dell, the world’s No. 3 personal computer maker, broke down details of the equity and debt financing secured for the buyout. Silver Lake is putting up $1.4 billion, while Bank of America, Barclays, Credit Suisse, and RBC will provide roughly $16 billion in term loans and other forms of financing. It was also disclosed that under certain circumstances if the merger cannot be completed, Michael Dell and Silver Lake could have to pay a termination fee of up to $750 million to the company.
Microsoft Corporation (NASDAQ:MSFT)’s questionable investment decision
No one has a better combination of liquidity, cash flow and horrid investment track record than Microsoft. With the Dell deal, Microsoft went into the vendor financing business. The price was $2 billion plus the enmity of every PC and Tablet maker on earth that isn’t Dell. The investment gives Microsoft no control over Dell operations and no equity.
Microsoft’s marriage to Dell had to come as a delightful surprise to Google Inc (NASDAQ:GOOG), which would love nothing more than to partner with Lenovo and Hewlett-Packard Company (NYSE:HPQ). Those two PC competitors hold control more than 30% of the shrinking PC market compared to Dell’s 10.7%.
As of the end of last quarter, Microsoft had nearly $70 billion in cash and short term securities, a figure that grows by about $2 billion a month. More than half of that, some $40 billion, is buried in U.S. Government securities. At current rates Microsoft would get a better ROI by making it rain in nightclubs! In the last 36 months, Microsoft stock has declined 10% while the S&P500 has risen over 30%. With shareholder friendly opportunities like that, who needs a terrible fund manager?
Now that Michael Dell has clinched a deal to take his company private, he faces the bigger challenge of turning a business falling behind in personal computers into a provider of high-margin cloud computing tools and services. The challenges faced would be:
1. Software push
A quarter-century after its premiere as publicly traded company, Dell’s in a tough spot. The PC maker has spent $12.7 billion to buy 18 companies since 2009, including Compellent Technologies in data storage and Force10 Networks in networking. Yet Dell isn’t bundling enough of those highly profitable products with the computer servers it sells. That would help it better cope with a PC sales slump.
In software, a $1.5 billion business, Dell needs to make a bigger splash in cloud computing tools for companies managing fleets of servers, networking gear, and business applications online without hiring teams of expensive consultants.
That could help Dell sell more software to midsize companies and enterprises seeking streamlined ways to manage their data centers, a $9.9 billion market occupied by heavyweights including IBM, Microsoft and VMware.
By going private, Dell could draw up a new playbook less contingent on satisfying shareholders. It can take steps to invest in the future, and emerge as a stronger company less reliant on PCs and able to claim a bigger slice of the technology industry’s profits. A closely held Dell would also save an estimated $556 million a year in dividend payments. It could use that money for severance payments and restructuring costs.
2. Debt costs
Without access to public-market capital, buying upstart firms with compelling technology becomes harder. Financing debt will also skim an estimated $1.2 billion a year, according to data compiled by Bloomberg. Dell’s debt burden could increase if interest rates rise.
Lower credit ratings would also push financing costs higher. Moody’s Investors Service lowered Dell’s senior unsecured rating to Baa1 from A2, and Fitch Ratings cut Dell’s long-term default rating to double-B-plus from single-A. Standard & Poors put Dell’s single-A-minus rating on negative watch.
One of the people likely to play a key role in reshaping Dell is Marius Haas, recruited in August after Michael Dell pressed him to join. Haas is trying to inject Dell with more urgency to pair storage and networking gear with the growing server business. Selling 2 percent more of high-margin gear with servers would add $1.2 billion in annual sales, said Haas. He said he’s been negotiating with Hurd, now Oracle Corporation (NASDAQ:ORCL)‘s co-president, to sell more Oracle database sales that run on Dell machines. About 60 percent of Oracle currently runs on Hewlett-Packard servers.
3. Selling servers
The enterprise efforts have paid off so far, with Dell emerging as one of the world’s biggest makers of servers used to run websites, process financial transactions and analyze business data. During the third quarter, Dell sold about 565,000 mainstream Intel-based servers, according to Gartner – just 65,000 less than market leader Hewlett-Packard.
Dell is poised to be No. 1 this year in the server market, its CEO said at a customer conference in December, giving the company a broad platform to pitch customers on its storage and networking products. Gaining a larger share in enterprise computing won’t be easy. A sizable portion of the server market has evaporated in recent years as huge volume customers, such as Google and Facebook Inc (NASDAQ:FB), buy directly from no-name manufacturers. While putting more emphasis on data centers, Dell will need to grapple with what to do with PCs, an ailing division that accounts for about half of sales. Within the PC market, Samsung Electronics, Lenovo Group and Asustek Computer are challenging Dell at the lower end of its business, while demand for Apple Inc. (NASDAQ:AAPL)‘s iPads and higher-end Macs remains buoyant.
“I’d shut it down and give the money back to the shareholders,” Michael Dell infamously said in 1997, when asked what he’d do in Steve Jobs’ shoes as he returned to Apple, at that time on the brink of collapse. Michael Dell’s public relations representatives have sniffily insisted this week that his 1997 verdict on Apple is “not relevant” to the buyout. Technology commentators have widely begged to differ, but Mr. Dell, like Mr. Jobs before him, will have to work very hard to save the computing pioneer he built from scratch!
The article Struggling PC Maker Goes Private, Finally! originally appeared on Fool.com and is written by akanksha patodia.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
