Wednesday, February 6, 2013

Not Your Normal PE Deal: Dell

Not Your Normal PE Deal: Dell

It turns out that Silver Lake, the private equity firm, isn’t offering $13.85 per share to take Dell Computer private.  Silver Lake will be part of the deal, but Michael Dell, the founder, will be the controlling investor.  Of course, Mr. Dell isn’t just the founder of the company; he’s the chairman and CEO.  If you’re an investor in Dell, you’re left to ponder a few possibilities.  Perhaps, Mr. Dell and Silver Lake will talk exhaustively about operational change, but spend most of their time engaging Wall Street to rejigger the balance sheet.  Without reading further, you probably know where I’m placing my bet.

The PC business never fully recovered after the bubble burst in 2001-2002.  By the time economic conditions improved, the PC business was under assault from a wide variety of new devices, and a wide variety of companies fell by the wayside.  Microsoft, Intel, Dell, Hewlett Packard, which acquired Compaq, and Cisco Systems form the core of the industry for software, CPUs, computers, printers and networking.  The stock price of the best of these companies, Microsoft, is still over 50% below its all-time high set in 2001.   The industry is, quite simply, in a long-term decline.

Public Fund Work List (2003)

The computer industry is littered with failed turn-arounds.  In fact, IBM and Apple are the only two technology companies that I can think of that reinvented themselves.  Among IBM’s original mainframe competitors, the BUNCH[1] group, only Unisys (Burroughs and Univac) still exists at a fraction of its original size.   Mid-range computers suffered a similar fate.  In fact, Hewlett Packard has been the graveyard for numerous floundering mid-range computer manufacturers: DEC, Tandem, and Apollo.  In other words, Mr. Dell’s turn-around mission, which he began several years ago, is a long shot.

So is this a simple case of hubris?  No, Mr. Dell, Silver Lake, and Microsoft, which is investing in preferred stock, have decent prospects of making money on this transaction.  It’s not because they’re going to reverse Dell’s long-term fortunes.  I’m sure they’ll make some modest improvements in the company’s financial performance.  Those improvements, together with a healthy dose of financial engineering, will probably produce a tidy profit for the new investors.  Unfortunately for the public investors, Wall Street much prefers to provide leverage to companies going private, because there are so many fees to be earned in the process.

I’m looking forward to reading the proxy statement because it will make it appear that going private is Dell’s only option for resurrecting the company.  It will also spend dozen of pages describing the work of a special committee of the board of directors that will give the deal an aura of respectability.  If the public investors complain, they may be able to get a bit more for their shares.  In the end, Mr. Dell will take his company private, the balance sheet will be shuffled, and Dell will go public again in a few years.  Mr. Dell and his investors will book a profit and the banks will generate a pile of fees.  Meanwhile, computing technology will move faster than Michael Dell can possibly change the company.

[1] Burroughs, Univac, NCR, Control Data and Honeywell

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