10 Key Questions (and Answers) on a Potential Dell Buyout

Written by DH Kass 1
January 28, 2013

With feathers flying the last couple of weeks on a possible $15 billion Dell (NASDAQ: DELL) private equity buyout, especially with Microsoft’s (NASDAQ: MSFT) possible involvement, more questions than answers shadow the deal at this point.

Sanford Bernstein senior IT hardware research analyst A.M. (Toni) Sacconaghi Jr. last week put out a note outlining the sell-side research firm’s perspective on issues such as how the Dell private equity buyout process could proceed, whether the deal is likely to go through and how might Dell operate as a private company. Read on for Sanford Bernstein’s view inside the possible deal …

What is private equity’s interest in a Dell deal? Quite simply, Dell is inexpensive, borrowing rates are very low, and investor demand for high-yield offerings is strong. Also private equity firms have large amounts of cash and Dell represents a big target. Finally, Michael Dell is a committed partner, and his incentives and 16 percent equity stake are strongly aligned with the interests of private equity buyers.
Will Dell operate differently if the company goes private? Because the deal is principally a “buy low/sell higher” transaction, Dell is unlikely to change its capital and operations focus from enterprise solutions. Perhaps as a private company Dell may do fewer big deals such as its recent $2.4 billion Quest buyout.
Does the deal make financial sense? If the PC business stabilizes (that’s a big “if”) and Dell repatriates cash or raises more equity to lower its debt burden and provide more flexibility, a deal could make financial sense–but the buyout price must be less than $17 per share.
Dell has $14.2 billion in cash, most of which is housed offshore—can the vendor repatriate the offshore cash to use in the deal? Sanford Bernstein thinks it can: “We believe that Dell has become increasingly adept at accessing offshore cash for U.S. use. We believe that Dell may consider gradually repatriating its offshore cash over time to mitigate its debt burden–a more gradual repatriation allows Dell to take advantage of future accounting losses or changes in tax law.”
Did Dell leak word of a private equity buyout? Quite possibly, it did, to get market feedback on price and perhaps stir the interest of other strategic or financial buyers.
Does Michael Dell have a conflict of interest? Most likely he does, but any “[management-led buyout] inherently does and there are standard measures to ensure that the process is legally fair.”
How does the deal different from a typical acquisition? In all likelihood, the buyout group and Dell would issue public statements announcing an offer and that a special committee was evaluating it. Typically, a “shop” period of 30 or 60 days follows, in which other prospective strategic and financial buyers are approached to solicit interest in Dell.
Will the majority of Dell shareholders support the deal if it is financially sound? Sanford Bernstein thinks that a deal for Dell is likely to be approved by shareholders.
What (or who) might clog up the deal? Should an existing or new shareholder argue for a higher price and solicit others to follow suit, the deal could be endangered. In Dell’s case, its largest shareholder, Southeastern Asset Management, has a 7.5 percent stake in the company, acquired at an estimated average price of more than $20 per share. Southeastern has a history of activism and could attract the interest of other activists, who look to build positions and aggressively lobby to push up the price of a deal. If the deal price changes, banks supporting it could flee.
What’s the likely per share price at which the deal will get done? Barring an activist shareholder, Sanford Bernstein believes that the deal would get done somewhere around $14-$14.50 per share.