Everything You Need to Know About the Dell Buyout
After weeks of rumored talks, Dell has announced its sale to Microsoft, Silver Lake Partners, and founder Michael Dell for $24.4 billion, the biggest leveraged buyout since the 2008 financial crisis. The company went for $13.65 per share to its investors, according to DealBook's Michael De La Merced. Dell will own the largest stake at 16 percent, valued at $3.7 billion, after the transaction. In addition, Microsoft put in $2 billion, Silver Lake put in another $1 billion and BofA Merrill Lynch, Barclays, Credit Suisse and RBC Capital Markets put in a $15 billion debt financing package, as well. For those just catching up to the weeks of rumors, here's what it all means:
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Why does Dell want to go private?
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In short: It's not doing so well as a public company anymore. Over the last year its stock has seen a steady decline, which only had an uptick once rumors of its sale started circulating around mid-January, as you can see below. As you can see, the sale price of $13.65 is somewhere around a 25 percent premium on what the stock was trading at before the rumors of a sale began.
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The move also has a lot to do with the ego of its founder, sources told The Wall Street Journal's Ben Worthen and Anupreeta Das. "Interviews with current and former Dell executives, plus other people who know the CEO, paint a picture of a man who appeared increasingly worried about his legacy," they write. He also hated the comparison to Apple, or what his company could have been.
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Why all the financial trouble, though?
While "Dell Dude" Ben Curtis would say his absence from the company's advertising was the cause of its downfall, the computer-makers financial troubles have coincided with the death of the PC. For Dell in particular, its global computer shipments, which make up most of its revenue, declined by about 5 percent last quarter from the year before. A lot of that has to do with the increasing popularity of tablets and mobile phones. Tablet sales, for example, have grown from 17 million in 2010 to 122 million in 2012, according to a report from Business Insider. Mr. Dell himself admits he was surprised by the rise of these portable computer slabs. "I didn't completely see that coming," he told Worthen and Das. In addition, the poster-child for early '00s dorm room computers also failed to make the transition from hardware to business services, something its founder tried and failed to do, they add.
OK, but how will going private help the company change that trajectory?
A closer held Dell would allow the company to sell off the parts of the business dragging it down without major investor scrutiny and the pressure to post continual quarterly growth. Despite its ailing stock price, the company still has a big $14 billion pile of cash and it still sells a lot of hardware, $62 billion in revenue last year, to be exact. As a private company, it will not be under under pressure to perform for market investors, allowing it more maneuvering room to take short-term revenue hits that will allow it to restructure its business. For instance, as suggested by Quartz's Christopher Mims, it could sell off some of the dying PC business and invest in business services.
And what does Microsoft have to do with all of this?
The company has a relatively small investment, compared to all the other partners. Microsoft won't get board seats or governance rights, a source told Worthen and Das. Instead, the companies would "tighten their relationship," the person said. It's unclear what exactly that means, at this point. But it makes sense for Microsoft, which has of late gotten into the hardware making game with its Surface tablet.
How can this all go wrong?
Dell has been attempting a turnaround for years and analysts aren't completely convinced the company can move into a more lucrative, higher margine, business enterprise services, reports De La Merced. Here's Fortune's Shelley Dubois on the problem back in 2010, when similar rumors surfaced.
Going private might help it juice margins slightly, but not enough to come close to any of the new market leaders…Going private also presents an issue if Dell is going to pivot its focus to return to enterprise customers–one customer group that still values the Dell ability to quickly build, ship and support PCs. To get up to speed on enterprise quickly, Dell will have to purchase other companies who are ahead in the game. The best tool Dell has to buy and retain enterprise experts is, analysts believe, its stock.
