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.
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.
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.
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.