Michael Dell has been out of sight and out of mind for public investors since taking his company private in a leveraged buyout deal two years ago. But the man who revolutionized how personal computers were assembled and sold in the 1990s/2000s is re-emerging to reshape his company’s legacy and possibly that of the hardware industry. Per the WSJ, DELL just announced the largest tech take-over deal ever:
Dell Inc. and private-equity firm Silver Lake will buy EMC Corp. for roughly $67 billion in cash and stock.
Dell said it expects to fund the deal through a combination of new common equity from Chief Executive Michael Dell, Silver Lake and others, the issuance of tracking stock, new debt financing and cash on hand. There are no financing conditions for the closing of the deal, Dell said. Dell recently reported that it had about $12 billion of debt.
Upon completion, Mr. Dell will lead the combined company as chairman and CEO.
VMware, in which EMC owns about 80%, will remain a publicly traded company. EMC holders will receive $24.05 a share in cash in addition to tracking stock linked to a portion of EMC’s interest in the VMware business. VMware has a market value of about $33 billion. Dell said EMC shareholders are expected to receive about 0.111 shares of new tracking stock for each EMC share.
The value of the tracking stock may vary from the market price of VMware given the different characteristics and rights of the two stocks, Dell said.
Wow. A private company that was subject to a LBO due to sagging earnings and sales is buying another tech dinosaur with mid single digit earnings and sales growth in a debt fueled deal. Adding to the confusion is how to account for their VMware stake.
I am sure all the DELL, EMC and private equity guys from Silver Lake have sore hands from all the high-fiving. They will make history with the $67 billion deal, but the timing and complexity of the deal seems suspect. Prior to EMC’s 20% rally since Sept 29th, the stock was trading within a couple percent from its 52 week lows made in late August. If you are curious to see how DELL might have been trading (yes pie in the sky) if it were also public look no further than both IBM and HPQ which as of late September were also trading at 52 week lows. So you have two old tech hardware and services companies merging (quite the opposite of what is happening at HPQ as they are set to split in two) and the market is going to assign a higher value to the combination despite the fact the deal is not expected to close for up to one year.
And one more thing about DELL and their history of value creation, as reported by Felix Salmon when he was a columnist for Reuters in September 2012:
Based on their annual 10K filings, from Fiscal Year 2005 to 2012, Dell has purchased approximately 989 million of its own shares at a cost of over $24bn… Going back further to 1997 (through February 3, 2012), Dell has reportedly spent approximately $39 billion in share repurchases under a $45 billion repurchase program.
$39 billion is more than double Dell’s current market capitalization of $18 billion
DELL and Silver Lake ended up taking the company private for $25 billion two years ago. At the time their were no shortage of investors (including Carl Icahn) who thought the deal was jammed down ungrateful investors’ throats, Basically it was an inside deal.
This morning’s news sounds like another example of complicated financial engineering. This is is lieu of any tech innovation in the soon to be combined company’s core businesses. I’ll go out on a limb and say there is a good shot this deal, as announced today, never gets done.
It’s interesting that one of DELL’s main public messages this morning is how focused they will be on the reduction of the debt they used to get this deal done. The parties involved know they’re playing a shell game with existing levered assets. And they know the window is closing to be able to get this sort of deal done. I think its important to note that we are far more likely to be closer to an end of a technology cycle than the beginning of one where a deal like this would actually make sense. And that’s another sign of things gone haywire.