Tags: Dell | founder | buyout | bid

Michael Dell Likely to Sweeten Buyout Bid

Sunday, 24 Mar 2013 09:22 PM

Michael Dell, whose quest to take Dell Inc. private is threatened by bids from Blackstone Group LP and Carl Icahn, is likely to boost his offer as he strives to transform his company from fallen personal-computer leader into a contender in tablets and cloud computing.

Blackstone and financier Icahn made offers that exceeded the $24.4 billion buyout bid from founder Dell and Silver Lake Management LLC, according to people with knowledge of the matter. While Dell’s board may say Monday whether the new proposals are reasonably likely to be superior, it could also say it needs more time to study the offers, one person said.

The unexpected challenges to the original bid, which came as the company struggled to catch up with a new wave of nimbler competitors in mobile computing and business services, mean Dell and Silver Lake may have to respond with a better proposal. Michael Dell, who founded the PC provider in his Texas dorm room in 1984, needs to ensure majority control so he can pursue his plan to retool the struggling company as a maker of data-center gear and software for corporations -- without the scrutiny of public investors.

At least five analysts surveyed by Bloomberg earlier this month saw the buyout group increasing the bid to as much as $14.90 to $15 a share.

“Michael wants to play a role here,” said Jayson Noland, an analyst at Robert W. Baird in San Francisco, who has a neutral rating on the shares. “This is his company -- it’s been his life, his name’s on the door and he’d like to be part of the next stage,” he said. “The most likely scenario is Silver Lake and Michael Dell take this company private for something north of what they’re currently offering.”

Restoring Reputation

At $15, Dell still would be going private at about 5.4 times earnings before interest, taxes, depreciation and amortization, the lowest multiple for a technology buyout larger than $1 billion, according to data compiled by Bloomberg.

For the 48-year-old chief executive officer, once part of a technology-industry pantheon that includes Microsoft Corp. co- founder Bill Gates and Oracle Corp. CEO Larry Ellison, prevailing in a surprise takeover fight could help in the effort to restore Dell’s reputation and performance. Once the world’s largest maker of PCs, Dell has floundered as those machines have been eclipsed by tablets and smartphones from companies such as Apple Inc. and Samsung Electronics Co.

Dell, based in Round Rock, Texas, is also seeking growth in another area where it’s been outpaced -- the networking equipment, storage computers and software that run cloud- computing programs that feed those millions of devices with data.

‘Most Challenged’

“Dell is the most challenged company in my coverage universe, and two-thirds of their business ships with a hard- disk drive attached,” said Brian Marshall, an analyst at ISI Group in San Francisco, contrasting Dell’s PC-related business to mobile devices that user faster forms of memory. “Two-thirds of their revenue is commoditized. People are very cautious and leery,” said Marshall, who has a neutral rating on the shares.

Blackstone and Icahn submitted their proposals on March 22, the deadline of a so-called go-shop period designed to solicit competing bids for Dell. Southeastern Asset Management Inc. and T. Rowe Price Group Inc., the company’s largest outside investors, have said they would oppose the original deal because it is too cheap.

The two new bids offer existing shareholders a way to participate in any future gains, people familiar with the matter said. That’s a feature the Silver Lake-led offer doesn’t include. As the board studies the proposals, it may be weeks before Silver Lake and Michael Dell must decide whether to make a new offer, one of the people familiar said.

One Chance

Still, for Michael Dell and Silver Lake to control the company’s fate, they’ll need to act decisively if they do counterbid. Their buyout group has just one chance to top the tentative offers made by Blackstone and Icahn.

Blackstone, the world’s biggest private-equity firm, outlined an offer valued in excess of $14.25 a share in cash, said one of the people, who asked not to be identified because the process is private. Blackstone is working with Morgan Stanley, which is confident it can raise debt to finance the deal, according to the person. Icahn said he’d pay $15 a share in cash for 58 percent of the company’s stock, the person said.

Under terms of the original Feb. 5 merger agreement with Silver Lake, after the initial evaluation of the bids the board will take time to determine whether the counteroffers are superior. At that point the bidders would have to get financing commitments to support their offer. After that, if the board accepts a new offer, it is required to give Silver Lake and Michael Dell at least four business days notice to top it.

Stock Decline

“My guess is that Michael Dell and Silver Lake come back with a sweeter offer,” said Marshall. “Obviously these deals never get signed on the first offer.”

The Dell-led buyout group has the flexibility to raise its $13.65-a-share offer by at least 10 percent, to $15, though perhaps not as high as $17 a share, Marshall said.

That may come as a relief to longtime Dell shareholders who have watched its stock plummet from more than $30 a share in 2007 -- when its founder took back the reins as CEO from Kevin Rollins -- to $10.88 on Jan. 11, the last trading day before Bloomberg News first reported that the CEO was in talks to take back majority control of the company. Dell closed March 22 at $14.14 in New York, 3.6 percent higher than the Silver Lake group’s offer.

David Frink, a spokesman for Dell, Christine Anderson, a spokeswoman for New York-based Blackstone, declined to comment, as did Icahn and Mary Claire Delaney, a spokeswoman for Morgan Stanley.

Business Impact

Michael Dell’s 15.6 percent stake in the company gives him sway over whether any deal gets approved, though he has pledged to work with whatever party makes a superior bid. Any deal also needs the approval of half of Dell’s shareholders, excluding the founder. He can also dip further into his MSD Capital private wealth fund, with an estimated value of $9.6 billion, according to data compiled by Bloomberg.

The longer the question lingers about who will own Dell, the more its resellers could hold off on ordering the company’s products, Noland said.

“This isn’t good for Dell’s current business,” he said. Dell had last year privately forecast $5.6 billion in operating income for 2014, a figure that is now going to come in around $3 billion, one person familiar with the matter said.

Yet for all of Dell’s woes -- an overreliance on low-margin PCs that consumers and businesses are keeping longer, a straggling position in mobile devices, and a patchwork of enterprise storage, networking and software products cobbled together through about $13 billion of acquisitions the past four years -- the company has attractive points for the private-equity industry.

Cash Flow

It’s been generating $1.60 in free cash flow per share during the past year, better than some of its PC peers. Dell is also No. 2 in Intel Corp.-based servers behind Hewlett-Packard Co., providing a platform on which to sell gear gained through acquisitions, including storage companies EqualLogic and Compellent Technologies, networking firm Force 10 Networks, and Quest Software, which sells management programs.

“It’s surprising and somewhat ironic to see three of the biggest investment groups coming after Dell,” said Baird’s Noland. “But private-equity buyers need to be private-equity sellers, and need to be concerned about what Dell looks like in five or six years.”

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Michael Dell, whose quest to take Dell Inc. private is threatened by bids from Blackstone Group LP and Carl Icahn, is likely to boost his offer as he strives to transform his company from fallen personal-computer leader into a contender in tablets and cloud computing.
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Sunday, 24 Mar 2013 09:22 PM
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