Dell Officially Goes Private: Inside The Nastiest Tech Buyout Ever

Eight months is a long time to stay mum, especially for a tech industry wunderkind, as Michael Dell was, and one of the world’s richest men, as Michael Dell is, while enduring daily bombs from Carl Icahn about his leadership and ethics. (“All would be swell at Dell if Michael and the board bid farewell,” Icahn tweeted at one point.)

So as he strides in front of 350 employees in the glass-enclosed conference room of Dell’s Silicon Valley division a few weeks ago, with celebratory gourmet cupcakes frosted with the company’s blue logo nearby, you can literally feel a weight coming off his chest. “It’s great to be here and to not have to introduce Carl Icahn to you,” says Dell, the parry prompting laughter and cheers. “We’re the largest company in terms of revenue to go from public to private. In another week or two we’ll be the world’s largest startup.”

It’s not that Dell hasn’t been talking. Ever since February, when he announced his plan to take his eponymous company private, armed with his own fortune and billions from the private equity firm Silver Lake Partners, he’s traveled the globe–including three trips to China–privately reassuring everyone who would listen that Dell was business as usual. But at the advice of counsel he kept a tight lid on talking about the buyout.

Now, having closed a $25 billion deal to take the company he founded in his dorm room private, the shackles are off. He can say what he wants–and do what he wants, too. After mixing in his 16% ownership, valued at more than $3 billion, and another $750 million in cash, with $19.4 billion from Silver Lake and a consortium of lenders, he now controls a 75% stake in the Round Rock, Tex. company. The only investor conversation he has to have, he says, is with “self.”

So what is Dell now saying to himself, as well as customers, partners and employees?

Most critically, the world’s third-largest personal computer maker has no plans to abandon the PC, despite that product line’s sinking fortunes. In fact, he plans to sell way more of them and, if the recent past is any guide, he may just sell them at a loss. Selling commodity boxes on the cheap allows him to get Dell in the door to upsell customers on lucrative software and services. Dell has driven down the prices of PCs many times before. But a PC maker selling PCs as a loss leader? That’s the kind of thing you get to do when you take a company private. “We’ve always viewed [PCs] as a business that’s got a life cycle to it. Growth is in new areas, and it’s a business you’ve got to manage very efficiently from a cost structure. It’s still a great way to get into new customers,” says Dell.

The world got a taste of this land grab in Dell’s last quarter as a public company. Net income dropped 72% from a year earlier–but Dell’s PC share ticked up one percentage point, its largest move in almost three years. There’s a long way to go to rebalance the business. After four years of work and $13 billion in services, software and other acquisitions, the firm still gets more than 60% of revenue from PCs. Dell’s market share in services and software stands at less than 1%, but these are the only categories making money and growing. Enterprise solutions, software and services revenue was up 9% in the latest quarter, and services comprised 100% of total operating profit. And in addition to battling traditional rivals like Hewlett-Packard and IBM, the company also has to worry about IT newcomers such as Amazon and Rackspace, which are wooing businesses with cloud-based services.

Yet some of the smartest minds on Wall Street, including Icahn, are convinced Michael Dell and Silver Lake got a steal at $25 billion, putting 20% down. “I agreed with the shareholders that he was not paying a fair price for Dell and that they were getting hosed,” Icahn says.

Hosed may be too a strong a word. No one else but Dell wanted the company that badly, not even Icahn, who had a “win win,” walking away from eight months of grandstanding with a stake worth $2.2 billion, and after squeezing out another $500 million for shareholders. The growth-challenged company will be buried under just less than $20 billion in debt in an industry in secular decline.

But Icahn knows what Dell does: that without dividends and buybacks, he should have enough cash flow to cover the interest payments. And without the public markets to worry about he has the flexibility to pull off the rebalancing act. Silver Lake, which in its last three tech deals reportedly made 213% on Skype, 730% on disk drive maker Seagate Technology and 430% on chipmaker Avago Technologies, can do the math, as well. Conservative estimates peg the potential returns on this leveraged buyout at 11% a year, based on the most recent dismal earnings. And if cash flow growth comes back–or the current results are being, shall we say, sandbagged a bit? Then Dell will neatly bookend the founding legend of his University of Texas dorm room

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Posted by plates55 - November 5, 2013 at 12:39 pm

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