Dell in $24 Billion Deal to Go Private
dealbook.nytimes.com
dealbook.nytimes.com
The deal structure is interesting, with Silver Lake contributing cash, Microsoft a $2 billion loan, and Mr. Dell simply rolling over his stake (though his fund, MSD Capital, will contribute some cash, too). The rest is debt financing from Barclays, Credit Suisse, Bank of America, and Royal Bank of Canada.
Back then Apple wasn't in great shape, running at a marginal loss or profit, but other companies at the time, like Compaq, were bleeding hundreds of millions of dollars in losses per quarter.
If they entered the Hardware market directly, they compromise Windows - for example companies would distribute Linux with their machines more openly and they could lose the "XXX recommends WinX". So they could do this indirectly by owning Dell privately and pulling the puppet strings.
Secondly if you want to run a massively parallel search engine like bing - you need a lot of hardware. They would probably seat a specialised hardware team at Dell and take the machines at cost.
I suspect that bike-shedding is the major issue.
If you are going to wear a suit, wear one properly.
He would be ahead (at least in my mind, not that my opinion matters) if he just wore properly fitting slacks and a polo vs an ill fitting suit. He'd be better off wearing a hoodie and jeans too because at least then we know he doesn't have any respect for the idea of "dress is important"
EDIT: Fixed spelling
Do you think his business would run better if he wore better fitting suits?
But Dell is wearing a suit which means that he in some way feels it's necessary to do so. But he does such a bad job of it that even a glance makes it obvious he doesn't know what he's doing. Or the person he paid to get him a suit did a horrible job. Given that he's "running" a $24 billion dollar company I would like to see better attention to detail on a thing that he must think is important, as evidenced by his wearing a suit.
It's worth noting that Dell is a Texas company, and the t-shirt and jeans look is still a pretty specifically SV trend.
But if so, would the other board members care either way about Ubuntu/Linux?
And even if they do they could give in on this to get something else.
Of course they would care if it brings profit.
More than anything, I'm amazed and dismayed that tablets are far surpassing the screens they put on laptops these days: http://www.google.com/nexus/10/ - why won't anyone who's not Apple make a decent screen?! They've gotten worse, as my current machine does 1920x1200, and you can't find those anymore.
Windows 8 does have better handling for high DPI screens, so hopefully we will see some higher resolution screens coming out over the next year.
I also blame the "HD" moniker. My rant on HD: http://tiamat.tsotech.com/hd-sucks
The perception in the non-Apple segment of the market is that the customers will not bear the increased cost.
A $250 laptop will last you 6 months while a $1000 laptop will last you five years, but there is still the market who finds a better deal in the incredibly shitty computer.
Higher price points let them include higher specs, even on non-obvious pivots like pixel density and overall build quality.
Also worth noting is that 1920x1200 is less dense than the Retina displays.
So you'd expect it to cost less.
I run Linux, and I am not interested in MacOS X, even if the hardware is nice. It's not a good fit for how I work.
$1000 is the high end of the Windows laptop line, and gets you just as much as the $2500 Macbook. But you're right, when you hit that price for Windows laptops, people sometimes begin to balk and move to Mac, for one reason or another.
Other companies are catching up (have caught up?), but relatively poor scaling in Windows 7 made it more difficult. Windows 8 still has the same scaling issue for desktop apps.
(As an aside, my Dell laptop runs Ubuntu and keeps the Windows OSes caged in VMs... :) )
In my experience, the vast majority of such devices are wiped and loaded with pirated Windows.
Until they start enforcing copyright protection, quality software alternatives will never get the boost they need.
Nokia is different - Microsoft wasn't displacing a successful smartphone business, they bailed out a massive clusterfk. Maemo was promising, sure, but in no way profitable. Basically, Nokia wasn't in a place financially to make a long bet on a new player in the smartphone OS market - Microsoft was.
Facebook is a victim of this on one end. They delayed their IPO as long as they could as Zuckerberg loathed what having to please outside investors would do to the nimbleness he requires. They then waited too long and so are now trying to excite the markets with a company that's already past its most exciting part of the growth curb. Add to that obvious greed and ego in terms of pricing as high as possible and you have a huge web blanket thrown on the ability for other tech companies to IPO.
Dell is on the other end. They decided it was better to invest 6 months of their lives into going private so that they too could innovate for the longer term.
At the end of the day we've gone from the go-go days of the 90's where nearly any tech company would IPO to a point where very few IPO either because they can't or don't want to. That will fundamentally change how companies are funded going forward and will likely impact the amount of returns being generated at the critical (for VC's) end of the funnel. My hope is that public markets realize this and begin to roll back some of the more arduous regulations.
An LBO is basically a gamble that there is a cash cow under all the fat, and once the fat is trimmed investors will see the company's true value.
Cisco has been dabbling in that area with CITEIS, but I don't get the impression it has seen too much traction.
I expect an overwhelming majority of Dell gear that is doing anything along the lines of private, flexible infrastructure is running VMWare who seems to getting ever closer to EMC (whose relationship with Dell is probably thoroughly sour post-Compellent acquisition).
I'd think Dell's best shot a such a move might be to work with Microsoft on a private, Azure-branded stack.
I get the impression that there isn't much behind the stated OpenStack membership/support by the Enterprise names.
Silver Lake, if they're like other private equity firms, are going to want a 20% return in around 5 years. They're going to put pressure on him to sell the unprofitable parts of the firm.
It did pretty well, no?
Do you think most of the market wants more speculation, or more stability?
In some sense, taking a company public is cheating because public markets are easy to manipulate, just look at the Facebook IPO (note, I'm not saying Facebook broke the law, just that they built up hype in a way that would not have been possible in private markets). Facebook didn't actually have to convince any VCs that it could turn a profit. It just had to convince VCs that it could have a successful IPO. There's a subtle, but important difference there.
I saw your comment on manipulating public markets and see it referenced below in a couple of places too by others. Honestly, Dell pulled his company private because he can't manipulate public markets. It's important to remember that. Zuckerberg and FB have gone from wunderkind to potential "loser" status when moving from private to public markets.
In terms of the market manipulation, I'm not saying that just anyone can come along and screw with the public markets. Dell can't manipulate the markets because the company is well-understood and operates in a well-understood market. Pretty much by definition startups are not well-understood and most (though certainly not all) operate in poorly-understood markets (or at least operate differently from incumbents in their markets). This means that startups have a better shot at successfully manipulating the public markets, allowing VCs to get paid even if the company itself doesn't pan out.
In other words, the $24 billion is there by virtue of the company being Dell and Michael Dell's participation.
Assets which in 2012 produced a 7.3% un-levered ROA (earnings before interest after taxes / assets) and are levered only 5x (assets / equity) in historically low rates (Lenovo is 6.7x). Not to say this is anything close to a slam dunk. But the pressure of working to make the next interest payment isn't so dissimilar from slaving to your next fund-raise.
Note the difference between capital and money, assets and liabilities, stuff and claims. Companies are arrangements of capital, physical and intellectual. If the value of that arrangement is zero or negative one liquidates, i.e. shuffles the capital around without changing its value while marking down the claims to show the presumed valuable arrangement has vaporised. The inverse of liquidation is entrepreneurship, i.e. shuffling capital into an arrangement of value. When this is successful the claims are marked up to reflect the arrangement's value.
Capital has inertia - shuffling it around takes energy, e.g. recruiting costs for intellectual capital. ABCD -> AB + C + D takes less effort than E + F + G + H -> EFGH. We only liquidate when there is nobody willing to pay for the arrangement. Similarly, we only build when there is nobody selling it.
[1] http://www.sec.gov/Archives/edgar/data/826083/00008260831200...
I would guess that Michael Dell is betting on the fact it is easier to change the bad parts of Dell, than it is to completely re-build all the good parts.
Can someone explain what, exactly, has been preventing the CEO and founder of the company from doing what he thinks is best. Is it just the threat of being fired (like Steve Jobs)? By the "board"? Will that threat disappear?
Even private companies have a Board, so the same situation exists today. Likely just new people on the Board, along with Michael Dell.
For example, they can now have less of a focus on margin. It's the constant quest for margin that had Dell outsource its whole company to Asus:
http://www.asymco.com/2012/12/07/the-real-threat-that-samsun...
As a private company they can do a much better job of controlling the impression the publish has of them, they are less distracted by shareholder concerns, and they have a small number of shareholders to answer to and be frank with.
For a company that is self sufficient (which is to say doesn't need to go to the public to raise funds for operations or expansion) it is a lot simpler. It has been stated that this is why Fry's Electronics never will go public.
This is common price action during M&A.
(2) Merger risk. Did I say risk-free? I lied. Deals fall apart for reasons ranging from shareholder litigation to antitrust issues to Michael Dell getting pissed off because his socks got wet. The difference between the forward stock price (stock minus time value) and payout is the expected probability of the deal closing.
Disclaimer: I have an outstanding position in DELL.
merger risk goes both ways, stockholders could ask for more money, balk at tendering shares in the deal, take it to court.
Note that today the stock did get bid up to $13.48. If the deal takes {90, 180, 270, 360} days to pay out, you would be borrowing from the market at {5.2%, 2.6%, 1.7%, 1.3%}. Add to that the cost of a call (to protect you from a rival bidder or enhanced tender) and subtract the probability of the deal falling through and you have a cost of capital. This isn't risk-free since 13.48 != 13.65, but depending on your time horizon, break-up assumptions, and the asset you're buying with the financing, it could still be an attractive proposition.
Why do the institutional investors make this bet - they have advantages that average investors don't. Leverage (they're making this bet with other people's money), options (limited downside risk), or the skeptic may even say, insider information.
How does this work exactly?
Does this mean that Dell will no longer be an equity owner in the new private company and he's surrendering all his equity?
Or is Michael Dell simply saying, as long as I get to keep 14% of this new private entity, you don't have to pay me out on this deal to go private.
I avoided speculating on the transaction mechanics given that this is Hacker News and not FT Alphaville's Long Room - sorry if that caused confusion.
It is exactly that. He(Micheal Dell) is not getting the cash deal that other investors are. He is not getting the same deal that other investors are getting. It is that simple.
> You are not allowed to favour some shareholders over others.
No one said they could. He does however have special terms for himself in this deal.
So the usual "it worked for IBM" strategy most hardware and infrastructure companies ends up with when sales go south, with mixed results.
That's why this deal came out at a 25% bump over where the share price was when the deal was announced. This bump is intended to entice shareholders to vote for it.
From the shareholders perspective DELL US Equity has been in a downward slide for the past year and only rebounded with this news, so if they don't take the deal then they can probably expect the share price to fall from almost 14 back to under 10 pretty much instantly.
To prevent a very small minority from stopping the will of a large majority once the deal has an overwellimng majority( I think its 95% but I might be wrong on the exact value), they can then force the remainder to take the deal.
This might seem like a bad deal for the hold outs but if this type of provision wasn't' enabled then no company could ever go private as there would always be that one person who holds onto a single share just to be a pain in the ass:)
Having said that, if you look close at the consortium's offer, there is for sure a clause that states that the offer is for x%-100% of the outstanding share capital.
So I think this is good for Dell. Breaking free of shareholders who just play the money game.
"To me It seems that stock has almost no relation with the company anymore. It's a game of buy and sell that is dangerous for a company."
Unless the company needs to raise additional capital, which apple does not, the stock price cannot be dangerous for the company.
"Apple lost a load of money within hours. I don't think there will ever be a company which is flexible enough to handle changes in value that fast."
Apple's shareholder's lost money within hours. The company is still profitable.
"So I think this is good for Dell. Breaking free of shareholders who just play the money game."
You may be right, private companies can change management incentives to be longer term rather than stock price based which can allow for high risk, long-term strategies. We won't know for several years until the company goes public again (assuming the deal closes).
I don't think this is true anymore. Discussion of executive performance these days starts with stock price (and often ends there.) Executives are encouraged by shareholders and the business media to prioritize short-term stock prices over long-term growth. It can be hard to overcome that bias, especially when executive compensation is usually tied very closely to stock price.
It isn't dangerous for executives either but it may influence them to manage earnings or attempt short-term cuts, both activities are usually detected by investors and lead to no price action or lead to negative price action.
I think if the shares were higher they might be able to entice future employees perhaps, but they have so much money, they could have even paid Tim Cook billions in cash and it would be rounding error.
http://www.youtube.com/watch?v=OMR1BZ9aYM8 (first 6 minutes)
The BRIC nations are competing and it's showing.
IBM has sold its PC division to Lenovo, HP flirts on and off with exiting, and Dell has declared itself a services company.
Another insight is the sheer number of desktop computers up for sale on CraigsList and the staggering number of pallets of used equipment up for auction. They're metaphors for the shift/restructuring currently taking place. Those systems aren't necessarily being replaced. Many of them represent desktops used in jobs that no longer exist.
> Under the terms of the deal, the buyers' consortium, which also includes Microsoft, will pay $13.65 a share in cash.
So the stock probably won't sell above that number, but won't be far off from it until the deal closes. Since it's a cash deal, after the deal closes you'll probably be compensated with cash (your shares would disappear from your brokerage account and you'd gain the equivalent cash value).
(Assuming I had shares, which I don't.)
This is the same thing that would happen in an all-stock transaction: let's say you own shares in Ford, and General Motors announces a buyout of Ford. The end-result is that you now own some percentage of GM, since Ford is now part of GM. Poof: your Ford shares convert to some equivalent number of GM shares. Do you cease to own Ford? Well, kind of, since Ford just ceased to exist. So there's nothing to "hold on to" in the sense you're implying.