
Dell in $24 Billion Deal to Go Private - chaz
http://dealbook.nytimes.com/2013/02/05/dell-sets-23-8-billion-deal-to-go-private/
======
JumpCrisscross
This is one the largest LBOs in history, the largest since the financial
crisis, and an audacious in swimming upstream against technological trends.
There is still a 45-day go-shop period during which Dell will entertain
competing bids, though without Mr. Dell's stake this is unlikely.

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.

~~~
DeepDuh
Microsoft still seems to have a thing for saving struggling computer
companies. Will this one bite them later too?

~~~
Uchikoma
Like their (hidden) takeover of Nokia (money + people).

~~~
Swannie
This was the only one that immediately came to mind... what are some other
examples that the GF is referencing?

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joebadmo
<http://www.wired.com/thisdayintech/2009/08/dayintech_0806/>

~~~
Swannie
Holy Crap. I'd totally forgotten all about that! Wow, yeah, that was a big
deal back then.

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msandford
Could someone help Michael Dell buy a properly fitting suit? The guy looks
like a gorilla with the cuffs nearly covering his hands. I'm not saying he
needs a $10k Savile Row cut-to-fit but it'd be nice if the guy talking about a
$24 billion dollar deal doesn't look like he bought a suit off the rack at JC
Penny's.

~~~
lifeisstillgood
This is weird - if Dell was a woman, _everyone_ would comment on his (her)
ill-fitting two-piece. But this is either a nice balancing of the sexism
divide we have seen recently, or its bike-shedding.

I suspect that bike-shedding is the major issue.

~~~
msandford
I don't really care what he wears. But the fact that he wears a suit means he
feels it's important, and the fact that it's very bad means either he or
someone who works for him has atrocious attention to detail.

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

~~~
moe
Perhaps he just doesn't care either way?

Do you think his business would run better if he wore better fitting suits?

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nextparadigms
While not huge in the grand scheme of things, Dell has probably been the
biggest vendor of Ubuntu machines, mostly in India and other poor countries.
For $2 billion Microsoft gets to tell them to kill any such Ubuntu or Android
product line-ups, and any research involving them. How is this good for Dell
itself as a company, especially with the Windows/PC market going down? Is Dell
really letting Microsoft turn them into another Nokia?

~~~
davidw
I've used Dells for a number of years and been pretty happy, but this does
have me a bit worried. I was really pleased the one time I did have a problem,
while living in Austria, with a machine I'd bought in the US: very quick
service and no hassles to fix it, so the fact that it's a big, global company
turned out to be pretty positive. I'm not sure who else I'd go with...

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.

~~~
runako
>> why won't anyone who's not Apple make a decent screen?!

The perception in the non-Apple segment of the market is that the customers
will not bear the increased cost.

~~~
freehunter
That market does exist though. I've known quite a few people who have asked me
for advice on laptops who were dismayed when I told them the cheapest they
could get a laptop was $250. I've also had the same type of people come to me
when their $250 laptop dies after 6 months and they "threw away all that
money" on some cheap garbage.

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.

~~~
runako
You're inadvertently helping me make my point. You've framed $1000 as a
high(er)-end laptop. The cheapest Retina MacBook Pro is $1,700; $1,000 is the
cheapest laptop Apple sells. That the entry-level price point to the Apple
system is at the high(er) end of mainstream PC laptops was essentially my
whole point.

Higher price points let them include higher specs, even on non-obvious pivots
like pixel density and overall build quality.

~~~
davidw
This laptop is something like 3 years old at this point, and I bought it new
for around $1200, I think. And it does 1920x1200. So it's not really that only
Apple can afford to put this kind of thing on a laptop - I don't buy that.

~~~
runako
We don't know what percentage of sales models like yours were of the
manufacturer's sales. Was that percentage increasing or decreasing? Was it
profitable? There are a lot of factors at play here. If it wasn't selling,
they're going to do less of that and more like the sub-$500 ones that are.
Perhaps they concluded that the market for $1200 laptops is not worth
pursuing.

Also worth noting is that 1920x1200 is less dense than the Retina displays.

~~~
davidw
> 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.

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jusben1369
Post dot come melt down the rules and requirements around financial reporting
were substantially strengthened. Some of that was a good thing but in general
it was an over reach. C level people now signed their names and risked
prosecution. The way revenue was recognized became so conservative as to be
nonsensical in many cases. The costs layered on to manage this became
significant. In short, it became more and more difficult to innovate if you
were a public company due to the costs and potential backlash from public
markets.

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.

~~~
rrrrtttt
I don't think Dell is going to innovate post-LBO. It's going to be saddled
with debt, most of it bank debt. The new owners are going to sell off all
activities that don't generate cash and milk the remaining parts until the
debt is paid off.

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.

~~~
kordless
I think there is a huge opportunity for Dell in the private cloud space. They
may not innovate on technology, but they could certainly innovate with new
business models using emerging technologies like OpenStack.

~~~
roc
Dell has plenty of opportunities, given their enterprise customers. The tricky
part is: almost all of those opportunities involve new services for post-
Microsoft IT. And how is Microsoft and their two billion dollars going to
react to those plans?

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natural219
Why wouldn't you just take the $24 billion and start a new company? Is Dell's
goodwill really that valuable, are the supplier relationships that valuable?
Or is it because of some legal non-compete reason?

~~~
JumpCrisscross
Let's take out the $11.3 billion of cash and short-term investments on Dell's
last quarterly balance sheet [1]. Yes, a lot of this being overseas, but
that's much less problem for a private company than a public one. So we're
really paying $13.1 billion for the assets.

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...](http://www.sec.gov/Archives/edgar/data/826083/000082608312000019/dellq3fy1310q.htm)

~~~
natural219
Thank you for the thorough and understandable answer. I realize my question
was naive, but I just didn't anticipate that Dell had such a considerably low
price-to-assets ratio (okay, I made this ratio up. I'm obviously not a finance
guy). I assumed that at least a big part of the buyout would be a premium on
top of the revenue-generating assets, and I was wondering what factors might
drive that premium up. Your last point seems to answer that question
sufficiently.

------
Jabbles
_As a newly private company – now more firmly under the control of Mr. Dell_

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?

~~~
Swannie
He gets to move to a longer term view than the next quarters numbers.

~~~
loumf
This and other items that Wall St. cares about, but aren't necessarily in the
best long-term interest of the comapany.

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...](http://www.asymco.com/2012/12/07/the-real-threat-that-samsung-
poses-to-apple/)

------
coob
Can someone help me understand: If the deal has been announced at $13.65 why
are shares still trading lower?

~~~
JumpCrisscross
(1) Time value of money. Shareholders aren't getting $13.65 today. If DELL
traded at $13.65, I could short it and earn a risk-free yield on the short
proceeds between now and when the payout is made.

(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.

~~~
bluedevil2k
What?? If you short it at today's price of $13.39 and then are forced to buy
it to cover your short at $13.65, you're going to lose money.

~~~
JumpCrisscross
I was illustrating, by negation, why a $13.65 buy-out shouldn't immediately
lead to the stock rising to $13.65 (because it would produce an arbitrage
opportunity).

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.

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alberth
>> "Michael S. Dell will contribute his stake [of DELL] of roughly 14 percent
toward the transaction..."

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.

~~~
JumpCrisscross
The second one, Michael Dell is essentially taking equity in the surviving
private entity in lieu of $13.65/sh.

~~~
bluedevil2k
Wrong again. There's tax implications that prevent him from just surrendering
his shares in the company in exchange for a large equity position in a private
company.

~~~
JumpCrisscross
I do not believe I suggested he would be surrendering his shares, but rather,
that he will not be taking a cash disbursement. I believe that he will take a
distribution of the OpCo's (thereby stripping the HoldCo's) to be subsumed by
the local NewCo, but given the complexity of the deal I wouldn't take too many
guesses.

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.

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mmahemoff
There's a lot of big words without substance in these quotes, but the most
meaningful part is that Dell's transforming to be a "global IT solutions
provider".

So the usual "it worked for IBM" strategy most hardware and infrastructure
companies ends up with when sales go south, with mixed results.

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mikecsh
Can anyone explain in basic terms how shareholders can be forced to sell their
shares back?

~~~
chollida1
For the most part they can't.

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:)

~~~
pwang
In fact, this "last stakeholder" problem is one of the game theoretic reasons
for things like eminent domain.

~~~
antr
Squeeze-out legislation has eliminated this problem. With control thresholds
at 90% to 95%, as of today it is rare that this "last stakeholder" problem
arises, as minority shareholders consent for their share sale is not required.

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.

------
ohwp
I've been following Apple stock lately. 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. 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.

So I think this is good for Dell. Breaking free of shareholders who just play
the money game.

~~~
glhaynes
Not sure what you mean when you refer to a company being flexible enough (or
not) to handle fast changes in valuation — I wouldn't imagine there has been
any significant change to Apple's operations or strategy during their recent
stock price movement.

~~~
ohwp
Well lets say a company is planning a big investment and suddenly stock value
dropped like stone. I think that can be very dangerous because suddenly you
have to rethink your strategy.

~~~
wtvanhest
The stock price doesn't effect the company, the company's actions, products
and more importantly future prospects influence the stock price.

"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).

~~~
jtbigwoo
_Unless the company needs to raise additional capital, which apple does not,
the stock price cannot be dangerous for the company._

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.

~~~
wtvanhest
I was extremely careful with my words, notice that I said "company" not
"executives" (similar to OP).

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.

------
johnohara
In 2009, in Davos, Vladimir Putin's response to Michael Dell's question
provided a glimpse into the long term challenges faced by Dell and others
(IBM, HP, etc).

<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.

------
Tloewald
At least Michael Dell is putting his money where his mouth is and giving the
money back to shareholders.

~~~
lostlogin
Here it is, surprised this popped up so late in the piece.

------
magicmarkker
Anyone know what this means for shareholders?

~~~
sootzoo
Silver Lake is buying for $13.65 a share:

> 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).

~~~
Ao7bei3s
What if I don't want to sell my shares for $13.65 but hang on to them? Can
Silver Lake just set a $13.65 value and force me to sell at that value to
them?!

(Assuming I had shares, which I don't.)

~~~
sootzoo
Yes, pretty much. The company is going private, and though the board and
shareholders have to approve the sale, they can do so without your explicit
approval, of course, just a majority (hence the bump in valuation of 25%). So
those shares are no good after the deal closes, because the public company you
have shares in just ceased to exist as a public company. Your return on
investment is the per-share purchase price times the number of shares you
hold.

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.

~~~
Ao7bei3s
Thanks!

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ck2
Are they trying to bain-ify the company? Or am I misunderstanding?

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niggler
From 2000 high of roughly $56/sh to a final price of $13.65

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3327
is the hacker news?

