Silverlake Partners IV – Committed Capital: $7.5 bn
Dell Inc. Mkt Cap: $23.8bn
Microsoft Inc. Mkt Cap: $234.9 bn
On February 5, 2013 Silver Lake Management LLC announced the completion of the largest LBO since the heyday of Blackstone’s acquisition of Hilton hotels back in 2007 and the largest buyout of a technology company ever, surpassing the 2006 “club deal” for Freescale Semiconductor LTD. by KKR, Blackstone, Bain Capital and the Carlyle Group.
The transaction is valued at around $24.4 bn, which implies a price of 13.65$/Share, representing a 25% premium over the close of 10.88$/share on January 11, 2013, the last day of trading before the information about a possible leveraged buyout leaked, and a 37% premium over the average 90-days closing price.
The structure of the transaction included the roll-in of the 15.7% of common shares owned by Dell’s founder and CEO Michael Dell, valued at $3.7bn, $700mm cash, $2bn through a loan provided by Microsoft, which entered the transaction later on and approximately $1.0bn in equity by Silver Lake Partners IV. The remaining $17.0bn came from financing made available by four banks: Credit Suisse, RBC, Barclays and Bank of Amerika- Merrill Lynch. Financing on Michael Dell’s part was made available thorugh his family office, MSD Capital, fonde in 1998 to manage his private wealth. The numbers make for a highly leveraged deal with approximately 30% in equity and 70% financed thorugh debt. The transaction includes a $450m break-up fee in favour of Silver Lake in case no deal takes place at all and a $180m fee in case Dell accepts another offer in a 45-day period open for other bids. The transaction represents Silver Lake biggest equità contribution ever and if the fund, which is still undergoing fundraising, will reach the hoped size of $10bn, it will represent a 10% of its overall equity, the maximum allowed by the firm’s investment committee, according to a recent presentation by the fund held in London in January.
J.P. Morgan and Evercore Partners are acting as financial advisors and Debevoise & Plimpton LLP is acting as legal advisor to the Special Committee of Dell’s Board of Directors. Goldman, Sachs & Co. is acting as financial advisor and Hogan Lovells US LLP is acting as legal advisor to Dell. Wachtell, Lipton, Rosen & Katz is acting as legal advisor to Mr. Dell. BofA Merrill Lynch, Barclays, Credit Suisse, and RBC Capital Markets (in alphabetical order) are acting as financial advisors to Silver Lake, and Simpson Thacher & Bartlett LLP is acting as legal advisor to Silver Lake.
The transaction has a long story, which did not start with in January 2013, but much earlier. As a matter of fact, a Special Committee was formed after Mr. Dell first approached Dell’s Board of Directors in August 2012 with an interest in taking the company private. Led by Lead Director Alex Mandl, the Special Committee retained independent financial and legal advisors J.P. Morgan and Debevoise & Plimpton LLP to advise the Special Committee with respect to its consideration of strategic alternatives, the acquisition proposal and the subsequent negotiation of the merger agreement.
Later on, in December 2012 an equity report by Goldman Sachs warned about the fact that the stock had lost in the past year 24% of its value and the company’s financials and the cheap debt could trigger a leveraged buyout.
The financial story, dubbed “very smart” also by Blackstone’s CEO Steve Schwartzman at the World Economic Forum, has also a big question mark on the operational side. The company owed its growth to its efficient inventory management and its “build-to-order” business model led Dell to become the top computer manufacturer in the world.
Fierce competition from both premium and cheap PCs and Tablets drew margins and market share down so that Dell became the no.3 PC maker after HP and Lenovo. Over the past five years, Dell has completed at least 25 acquisitions, most of which were valued at less than $1 billion each, compared to only five total deals in the decade before that, according to FactSet Research. The result has boosted Dell’s non-computer revenue by 30% since 2007, while PC-related revenue–hurt, in part, by emerging competition from tablets and smartphones–has dropped 5.8% during that span.
The idea behind the transaction is that by going private Dell will be able to operate a turnaround and diversify away by the shrinking PC-industry. They probably aim to do this also through the strategic help of Microsoft, the world’s biggest software maker, which operates in a different segment and has recently been able to diversify into mobile, apps and tablets.
Only time will tell if the operation was only a signal of the booming debt markets and a rebound of mega-deals or if it will become a story of a successful turnaround. By now Dell is a much more leveraged company, with top-line growing by 1% since 2008 and the 70% of its sales coming from a stagnating industry.
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