Dell goes private in $24.4B deal

Dell, maker of the XPS Ultrabook shown during

Dell, maker of the XPS Ultrabook shown during the 2012 International Consumer Electronics Show, has received a letter from stockholder Carl Icahn proposing a leveraged recapitalization instead of a move to go private. (Credit: AP)

Dell Inc., the world's third-biggest maker of personal computers, is going private in a deal valued at $24.4 billion, undertaking the biggest leveraged buyout since the financial crisis.

Chief Executive Officer Michael Dell and Silver Lake Management LLC will pay $13.65 a share, the companies said Tuesday in a statement. That's 25 percent more than the closing price of $10.88 on Jan. 11, the last trading day before Bloomberg News reported the discussions. Michael Dell is taking back majority control of the company he started almost three decades ago.

The stock has lost more than half its value since January 2007, when Dell resumed his role as CEO, amid investor dismay with management's failure to cope with upstart competitors in mobile and cloud computing. By going private after a quarter- century as a publicly traded company, Dell is seeking more leeway to cut jobs and adopt strategy shifts needed to court high-margin customers spending billions on data centers.


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"They obviously see the writing on the wall," said Daniel Morgan, a senior portfolio manager at Synovus Trust Co. in Atlanta. "They understand what the challenges are and realize they need to refurbish what they are doing." Even as being private shields Round Rock, Texas-based Dell from answering to public shareholders on a quarter-by-quarter basis, it subjects the company to new constraints, including the addition of debt. Following the transaction, Michael Dell will be chairman and chief executive, maintaining "significant equity," according to the statement.

Microsoft Contribution Microsoft Corp. is contributing $2 billion, according to the statement. Silver Lake, a technology-focused private-equity firm, was working with partners to line up about $15 billion in funds for the buyout, people familiar with the matter have said.

Dell, which trails Hewlett-Packard Co. and Lenovo Group Ltd. in the PC market, was halted in U.S. trading. Its stock plummeted 31 percent last year as it struggled to adapt to the industry-wide shift to smartphones, tablet computers and cloud computing services.

Consumers and companies are shunning PCs in favor of mobile devices made by Apple Inc. and Samsung Electronics Co., and Dell lags behind Oracle Corp., Cisco Systems Inc. and International Business Machines Corp. in data-center hardware, software and services.

Dell has seen its fortunes rise and fall since holding an initial public offering in 1988. CEO Dell, who founded the company with $1,000 in 1984 in his University of Texas dorm room, was viewed as an industry wunderkind, demonstrating that he could sell complex products more efficiently and conveniently than was thought possible.

Removing Middlemen By cutting out middlemen and honing manufacturing so companies and consumers got exactly the PC configuration they wanted, Dell grabbed share and piled up profit even with lower operating margins than rivals like IBM and Compaq Computer Corp., fueling an almost two-decade boom. Eight years after the IPO, Dell's stake was worth more than $1 billion.

Dell ceded the CEO role to Chief Operating Officer Kevin Rollins in 2004 only to come back to the helm in 2007 after the company lost its top PC spot to Hewlett-Packard and earnings fell short of estimates. The company was also beset at the time by an accounting scandal that later resulted in a $100 million settlement with the U.S. Securities and Exchange Commission.

Since his return, Dell has talked publicly about "pruning" his PC business while using the cash it generates to snap up companies in computer networking, storage, and enterprise software. Global PC sales fell 3.5 percent last year to 352.7 million units, market researcher Gartner Inc. said. Dell's market share fell 12.3 percent to 10.7 percent.

Falling Profit Those declines are reflected by falling profit. Dell will earn $2.98 billion excluding some items in fiscal 2013, compared with $3.49 billion in 2012, according to analyst estimates compiled by Bloomberg.

There's no guarantee that Dell will do better as a private business. Companies including networking-equipment maker Avaya Inc. and disaster-recovery software company SunGard Data Systems Inc. have struggled since going private last decade. Chipmaker Freescale Semiconductor Ltd. went public in May 2011 after a 2006 LB0, though its stock tumbled by 19 since then, through Feb. 4.

Other technology companies have attempted to go private and had the talks fall through over valuations or difficulty in financing deals. That was the case for disk-drive maker Seagate Technology Plc in late 2010 -- though it did have a successful LBO a decade earlier. Fidelity National Information Services Inc.'s buyout talks unraveled in 2010 after the company sought a higher price than private-equity firms were willing to pay.

Gross Margin Emphasizing data-center products and services has helped Dell stave off margin erosion. Gross margin is projected to be 22.4 percent in fiscal 2014, compared with 22.3 percent in 2012.

Still, the transformation into a provider of a range of business services, designed to lessen Dell's dependence on the PC market, didn't come swiftly enough to prevent going private from being the more attractive option.

Dell's transaction, if completed, would be the biggest LBO since Blackstone Group LP's $26.2 billion acquisition of Hilton Worldwide Inc., which was announced in July 2007. That deal was struck just as credit markets were seizing up amid a surge in subprime-mortgage defaults. Banks, stuck with loans they couldn't sell to investors, backed away from financing leveraged takeovers.

Debt Markets While debt markets have loosened up since 2010 as interest rates have fallen, the biggest LBO since 2007 was the $7.2 billion KKR & Co. paid for Samson Investment Co., the Tulsa, Oklahoma-based oil and gas producer, in 2011.

JPMorgan Chase & Co. and Evercore Partners Inc. served as financial advisers and Debevoise & Plimpton LLP provided legal advice to the board committee. Goldman Sachs Group Inc. provided financial advice to Dell, while Hogan Lovells US LLP is acting as legal advisor to Dell. Wachtell, Lipton, Rosen & Katz acted as legal adviser to Michael Dell. Bank of America Corp., Barclays Plc, Credit Suisse Group AG and Royal Bank of Canada gave financial advice to Silver Lake, with Simpson Thacher & Bartlett LLP acting as legal counsel.

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