Dell and Silver Lake Get It Done, With Some Love From Microsoft
Michael Dell has done it.
Along with Silver Lake, financing from banks and a $2 billion loan from Microsoft, he is taking Dell private in a $24 billion transaction – which everyone says is the largest buyout since 2007.
[I dug a bit deeper and found that the deal all of them refer to, but not specify, is the 2007 $32 billion TXU (texas utilities company) LBO on the part of Texas Pacific Group and KKR; But that was 2007. After the credit markets dried up and the world economy went into a tailspin, we didn't see any more large LBOs…until now and until Dell. For a list of other large LBOs leading up to 2007, refer the free LBO "scorecard" here. Anyway.]
The interesting thing about this transition, which is really a combination of a traditional LBO (a Private Equity firm buying a publicly traded firm for a bit of cash and lot of debt raised from banks and others) and an MBO (where management buys out the company from its current owners, who, in this case, are the shareholders) is that Michael Dell is going to not just control but run (Silver Lake Press Release) the new private entity:
Following completion of the transaction, Mr. Dell, who owns approximately 14 percent of Dell’s common shares, will continue to lead the company as Chairman and Chief Executive Officer and will maintain a significant equity investment in Dell by contributing his shares of Dell to the new company, as well as making a substantial additional cash investment. Dell will continue to be headquartered in Round Rock, Texas.
Contributing a lot of money to close the transaction, as he has done, is one thing…but the fact that Silver Lake, whose impressive portfolio of investments can be seen in the picture above, agreed to this transaction and its leadership structure means that they believe, as much as Michael Dell does, in his ability to “unlock value” from privately-held and run Dell.
If this story and the $ amounts involved captured your imagination, you may want to spend a few more minutes on a Bloomberg article that describes the “back story” behind the deal, how it came to be and how negotiations broke down a few times before things settled down.
Good luck to him and Silver Lake. The company’s trajectory over the next several years will be closely watched by everyone in technology and the LBO space.
PS: Where does good old Microsoft come into this picture? Initially it was rumored that Microsoft may also own part of the new Dell by way of an equity investment. But that kind of “vertical integration” into the Microsoft “supplier” ecosystem would have ruffled quite a few feathers – HP, Lenovo and Acer, to name a few.
So instead, it seems to have opted to loan a few billion…which is also unusual, but I guess that will keep the ruffling and associated rumbling, to a minimum.
Here is some employee-affecting data, va Dan Primack @ Fortune, whose daily newsletter I highly recommend you subscribe to
(at http://ebm.cheetahmail.com/r/regf2?a=0&aid=2087267012&n=1)
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I’m sure that a number of Dell shareholders are thrilled to be getting $13.65 per share, but I’m hearing some grumbling from employee shareholders inside of the company.
Here’s the issue: More than two years ago, Dell decided to limit the amount of company stock that could be held by employees in their 401(k)s. Basically an employee protection initiative in a post-Enron world, and in line with Department of Labor recommendations.
So in January 2010, employees received two pieces of information: (1) Beginning March 31, 2010, the max percentage they could contribute to the “Dell fund” within their 401(k) program would be 20%, and (2) At some point in 2012, a change would be made so that the maximum exposure they could have in Dell was 20% of their overall 401(k) investment.
Dell then reported a big earnings miss on May 22, 2012 – sending the stock from $15.08 to $12.49 in a single day. The following week, Dell informed employees that they would be forced to reduce their Dell exposure to the 20% level by October 19. If they did not do so by that date, Dell would do it for them by putting those extra shares on the market. The price on October 19 was $9.55 per share. Again, the buyout price is $per share.
To be clear, I’m not suggesting that Dell was trying to screw over its employees back when it made its original max contribution decision. In fact, it was a smart protective move.
But here’s the thing: Michael Dell informed the Dell board last August that he was interested in taking the company private, after which Dell formed a special committee to examine any proposals. The board might not have known if Michael Dell could pull off a deal, but it certainly knew that any offer would certainly be at a significant premium. Yet it apparently made no effort to postpone the October 19 deadline for employees – many of whom had shares sold at what became 30% lower than the buyout price. Or, to put it in dollars, if an employee had 1,000 “extra” shares, it would work out to more than $4,000 in paper loss.
A Dell spokesman provided the timeline, but declined to comment on if the board gave consideration to changing course (and, more importantly, why it chose not to do so).