Dell Buyout Could Be a Windfall for Shareholders
Mike is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
On January 14, rumors of a potential buyout of iconic PC-maker Dell (NASDAQ: DELL) hit the newswires and sparked a buying frenzy among the stock's normally sleepy shareholder base. Dell shares shot up by nearly 15 percent before being halted for the day. As the details of the proposed deal became clearer, the stock consolidated its gains. Although the situation remains fluid, the broad strokes of a deal appear to be in place.
The leveraged buyout proposal involves taking Round Rock, Texas-based Dell private in a cash deal that may exceed $20 billion in value. Dell's executive management team has retained JP Morgan as an advisor on the deal. On the other side, technology-company buyout specialist Silver Lake Partners leads a consortium of several interested private equity firms. Both parties appear to have agreed in principle that the deal should value the company at $13.50 per share or more.
Relative to Dell's pre-announcement closing price of $10.88 per share, the "worst-case" $13.50 figure represents a premium of about 24 percent. If the deal is closed at $14 per share, the premium would rise to about 28.7 percent. The stock is currently range-bound between $12.50 and $13. Assuming that the buyout goes through at $13.50, investors who jump into Dell at these levels stand to earn a premium of between 4 and 8 percent.
Once one of the world's hottest technology companies, Dell has endured a bruising half-decade. It remains heavily invested in the declining PC and laptop markets and has yet to make a major investment in the mobile space. In addition to its core hardware offerings, Dell also sells a variety of accessories and business-solutions products. These include printers, IT systems, keyboards, cameras, computer mice and other miscellaneous products and services.
Although it still employs over 100,000 full-time employees, its growth prospects look relatively bleak and it has engaged in several rounds of attrition-based employee culls. In addition, its sheer size cannot be overstated: In 2011, Dell earned about $2 billion on $58.7 billion in revenue. Then again, its 5.7 percent operating margin was among the lowest in its sector.
Under the terms of the proposal, Dell founder and principal stakeholder Michael Dell would contribute more than 244 million shares of company stock to the buyout's bottom line. This would reduce its total cost by approximately $3.6 billion and may make it substantially easier to secure the remaining capital investment necessary to complete the deal. The company's remaining shareholders would receive cash payments of between $13.50 and $14 per share.
At this time, it appears unlikely that any single bank would be willing or able to finance the entirety of this leveraged buyout. As such, its eventual success would depend upon the successful playing-out of two potential scenarios.
In the first, a group of four to five private lenders would contribute the capital necessary to pay off Dell's shareholders. Potential financiers might include major financial institutions like Citigroup (NYSE: C) and JP Morgan (NYSE: JPM) as well as private-equity groups and even wealthy private investors. This scenario would require a complex, ironclad agreement between the parties involved. For banks like Citigroup and JP Morgan, the success of such a blockbuster deal could provide an important public-relations boost in the wake of the debacle of the financial crisis. Should Dell succeed in turning itself around as a private company, the deal might eventually add billions of dollars of value to the stocks of any public banks that became involved.
In the second scenario, Michael Dell would provide a significant amount of the "down payment" on the proposed deal. With a fortune that exceeds $14 billion, his contribution could easily exceed the $3.6 billion that he appears to have committed to the deal already. An investment of $6 to $8 billion from Dell would substantially increase confidence among lenders and investors. In turn, this might drive down borrowing costs for any leveraged parties. Although he has given no indication that he might make a significant secondary investment in his own company, Dell's obvious personal connection to the firm that he helped to build is a point in this scenario's favor.
The Dell buyout would provide the company with some key advantages. The company has clearly failed to adapt to the changing technological milieu and is in desperate need of a turnaround. Thus far, it has failed to offer a convincing plan to capture a slice of the mobile market. In order to pursue this turnaround without incurring the wrath of shareholders or filing detailed financial disclosures, it may need to spend several years out of the limelight.
The success of this proposed deal is by no means assured. Its size and leveraged structure make it prone to collapse or delay. Due to the lack of interest from other major hardware makers, it appears unlikely that an extensive regulatory investigation will impede its closing. Then again, a last-minute intercession from a major technology firm like Microsoft (NASDAQ: MSFT) or Hewlett-Packard would surely attract regulatory scrutiny. Microsoft could pay for Dell out of its cash stockpile of $66 billion. Even Microsoft's net income in the last 12 months could cover the Dell purchase which is most likely to be around $15 billion.
In addition, the deal's success depends upon approval from shareholders as well as the company's board of directors. Although most independent observers believe that Dell's current valuation should be less than $12.50 per share, investors may not be willing to accept an offer that does not account for the company's out-year growth potential. As such, its current shareholders might demand substantial upward revisions to the current $13.50 offering price.
As of yet, no closing date has been set for the proposed buyout. The coming weeks' developments will be crucial in determining its fate.
mthiessen has no position in any stocks mentioned. The Motley Fool owns shares of Citigroup Inc and JPMorgan Chase & Co.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!