Dell founder strikes deal to turn it around

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FRANCISCO/NEW YORK: Michael Dell struck a deal to take Dell Inc private for US$24.4 billion in the biggest leveraged buyout since the financial crisis, partnering with the Silver Lake private equity firm and Microsoft Corp to try to turn around the struggling computer company without Wall Street scrutiny.

The deal, which requires approval from a majority of shareholders excluding Dell himself, would end a 24-year run on public markets for a company that was conceived in a college dorm room and quickly rose to the top of the global personal computer business - only to be rendered an also-ran over the past decade as PC prices crumbled and customers moved to tablets and smartphones.

Dell executives said on Tuesday that the company will stick to a strategy of expanding its software and services offerings for large companies, with the goal of becoming a full-service provider of corporate computing services in the mold of the highly profitable IBM. They played down speculation that Dell might spin off the low-margin PC business on which it made its name.

Dell did not give specifics on what it would do differently as a private entity, angering some shareholders who said they needed more information to determine whether the $13.65-a-share deal price - a 25 percent premium over Dell’s stock price before buyout talks leaked in January - was adequate.

“This feels like the ultimate insider trade. Why weren’t the plans and projections that Michael Dell has going forward been shared with me and other shareholders?” said Frederick “Shad"

Rowe, general partner of Greenbrier Partners and a trustee of the US$22 billion Texas Employees Retirement System. Rowe said he dumped about 400,000 shares of Dell on Tuesday, adding, “I was so irritated I didn’t want to think about it anymore.”       Dell spokesman David Frink said the board had conducted an extensive review of strategic options before agreeing to the buyout to ensure that the best interests of all stockholders were served.

Although Dell shares were trading at more than $18 a year ago, many analysts said they believed the majority of shareholders will accept the buyout because of pessimism over the growth prospects of the PC business.

“A private Dell is likely to more aggressively cut costs, in our view. But we think merely restructuring only postpones the inevitable, creating a value trap,” said Discern Inc analyst Cindy Shaw. “Dell needs to do more than reduce its cost structure. It needs to innovate.”     Dell was regarded as a model of innovation as recently as the early 2000s, pioneering online ordering of custom-configured PCs and working closely with Asian component suppliers and manufacturers to assure rock-bottom production costs. But it missed the big industry shift to tablet computers, smartphones and high-powered consumer electronics such as music players and gaming consoles.

As of 2012’s fourth quarter, Dell’s share of the global PC market had slipped to just above 10 per cent from 12.5 per cent a year earlier as its shipments dived 20 per cent, according to research house IDC.

Some of Dell’s rivals took pot shots at the deal, in unusually pointed comments that reflect how bitter the struggle is in a commoditised PC industry that has wrestled to reverse a decline in sales globally.

Hewlett-Packard Co, which itself has suffered years of turmoil in the face of challenges in the PC business, said in a statement that Dell’s deal would “leave existing customers and innovation at the curb,” and vowed to exploit the opportunity.

Lenovo, which consists largely of the former IBM PC unit, referred to the “distracting financial maneuvers and major strategic shifts” of its rival while emphasizing its own stability and strong financial position.

The deal will be financed with cash and equity from Michael Dell, $1 billion cash from private equity firm Silver Lake, a US$2 billion loan from Microsoft Corp, and between US$11 billion and US$12 billion in debt financing from Bank of America Merrill Lynch, Barclays, Credit Suisse and RBC Capital Markets.

The company said Michael Dell will contribute his 16 per cent stake in the company but did not say how much cash he would inject. The company will now conduct a 45-day “go-shop” process in which others might make higher offers.

“Though we were hoping for a higher price, we trust that the Dell board has properly done its job by conducting a process open to any third-party offers and reviewing all strategic options,” said Bill Nygren, who manages the US$7.3 billion Oakmark Fund and US$3.2 billion Oakmark Select Fund, which have a US$250 million position in Dell.

 “Should we hear evidence to the contrary, we’ll raise a ruckus.”     Sources with knowledge of the matter said Dell’s board, advised by the Boston Consulting Group, had considered everything from a leveraged recapitalization to a breakup of the company before agreeing to the LBO.

 Although the deal will load Dell with more debt, some Wall Street analysts said that was relatively low compared to the cash the company generates.

 Bernstein Research analyst Toni Sacconaghi said that if Dell were to use 40 percent of its annual cash flow of about US$2.5 billion to US$3 billion to pay down debt, a sale of the company in about five years could net Silver Lake, Mike Dell and other investors close to US$10 billion, or 5 times free cash flow at the time.

Helped by acquisitions, Dell has been building a business selling servers, IT services and other products for corporate clients that - while still dwarfed by IBM’s and HP’s - is growing at a near-10 per cent clip. Critics say it will not be easy for Dell to beat IBM and HP in this area, no matter what its corporate structure.

Sales of PCs still make up the majority of Dell’s revenues.

Dell said in a regulatory filing that no new job cuts were expected but it indicated more acquisitions down the road. The company has spent US$13 billion since fiscal 2008 to acquire more than 20 companies including several large software and services companies as it seeks to reconfigure itself as a broad-based supplier of technology for big companies.            

“We recognise this process will take more time,” Chief Financial Officer Brian Gladden told Reuters. “We will have to make investments, and we will have to be patient to implement the strategy. And under a new private company structure, we will have time and flexibility to really pursue and realize the end-to-end solutions strategy.”     Gladden said the company’s strategy would “generally remain the same” after the deal closed, but “we won’t have the scrutiny and limitations associated with operating as a public company.”    

Shares of Dell closed 1.1 per cent higher at US$13.

 Michael Dell returned to the company as CEO in 2007 after a brief hiatus but has been unable to engineer a turnaround thus far. Analysts said Dell could be more nimble as a private company, but it will still have to deal with the same difficult market conditions. -- Reuters


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