Dell Inc (DELL) Buyout Could Be a Windfall for Shareholders

Page 1 of 2

On January 14, rumors of a potential buyout of iconic PC-maker Dell Inc. (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.

Dell (DELL)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.

Dell’s Background

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.

Buyout Proposal

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 Inc. (NYSE:C) and JPMorgan Chase & Co. (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.

Page 1 of 2

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!