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
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

6 Ways to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

10 High Paying Seasonal Jobs in America this Holiday Season

The 10 Busiest Shipping Lanes in the World

5 Most Valuable Brands in China

The 10 States with Highest Substance Abuse Rates Crippling Their Populace

The Top 10 Things to Do Before You Die That Will Echo for Eternity

The 10 Best Selling Items on Etsy

Top 10 Things to Do in Tokyo, the Greatest City in the World

10 Mistakes on Social Media that Can Harm You and Will Probably Get You Canned

The 10 Best Cities to Find Jobs in 2014

The 10 Most Controversial Songs Of All Time to Hit (and get Banned from) the Airwaves

The 20 Biggest IPOs in US History

The 10 Best Places to Visit in Mexico that Are Beautiful and Safe

7 Bad Habits that Age You Beyond Your Years

The 40 Best Fortune Cookie Sayings That Will Leave You Bemused, Befuddled, or Beguiled

10 Foods to Eat Before a Workout to Make Every Drop of Sweat Count

The 5 Best Documentaries On Netflix You Must See

The Most Heartwarming and Inspirational Story Of This Halloween Season, It Will Make You Cry and Jump For Joy

10 Best Party Songs of All Time to Bring the House Down With

5 New World Order Conspiracy Theories that Will Strangle the World

The 10 Highest Rated Movies of 2014

The 10 Largest Container Shipping Companies in the World

The 10 Largest Armies in the World: Who Should We Be Afraid Of?

Best Warren Buffett Quotes on Money You Need to Hear

The 10 Highest Suicide Rates by Profession

The 20 Most Underrated Movies of All Time

The 10 Fastest Growing Companies in America

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 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!