Tim Mueller’s Transaction Analysis: New IT M&A Deals Jan. 30

Dell Considering Reverse-Merger with VMware

Financial Information*

  • Not Disclosed

Transaction Facts

  • Dell Technologies, the world’s largest privately held technology company, is considering a reverse-merger with VMware (NYSE: VMW), the ~$60B cloud computing company it has an 80 percent stake in.
  • The reverse-merger would be the biggest deal in tech industry history.
  • Though Dell has not responded, the board of directors is scheduled to meet later this month regarding the company’s future.
  • While VMware shares touched an all-time high on Thursday, shares dropped 16.63% percent, the steepest decline in two years, today as shareholders reacted negatively to the combination.

Finding the Right Fit

  • Moving Forward: The deal would allow Dell to be traded publicly without having to go through an IPO. VMware would issue shares to Michael Dell and Silver Lake Partners, the owners of Dell (Michael Dell and Silver Lake took Dell private in 2013 in a transaction worth $24.4B). The owners could then sell shares on the public market as a way of monetizing their investment.
  • Adapting to Change: The deal could also mitigate its $52.5B debt pile from buying storage-technology provider EMC for $67B in 2016, when Dell also purchased its majority stake in VMware.
  • More Pressure: In retrospect, the EMC acquisition failed to deliver the cost savings and performance as projected. Increasing component costs and a challenging data storage market have eroded the company’s margins, especially as AWS and Azure wage war with prices. The PC market has meanwhile remained stagnant.
  • Managing Expenses: While Dell’s server business is growing (the unit helped its total net revenue grow to $56.7B in the nine months to Nov. 3 from $41.6B a year before), the company’s operating expenses have been hefty. Operating expenses rose to $17.3B from $10B a year ago, resulting in an operating loss of $3B — up from a $1.6B operating loss a year ago.
  • Tax and Interest: There is perhaps an even more compelling reason than the ones listed above: tax reform. Dell’s debt pile is expected to become even more burdensome in 2018 as the new tax plan caps a company’s ability to deduct interest expense to 30 percent of its annual earnings before EBITDA. The company also pays ~$2B annually for interest payments.

To receive instant analysis on the day’s business news from Tim Mueller, contact [email protected]. Check out a list of diverse assets for sale on SBN’s IT M&A Marketplace powered by IT ExchangeNet here.

IT ExchangeNet is the industry-leading marketplace for matching buyers with sellers of mid-market IT businesses. Founded in 1998 by technology CEOs and M&A professionals, IT ExchangeNet is an efficient marketplace for owners of mid-market IT businesses seeking buyers or strategic partners. ExchangeNet follows a disciplined and highly targeted process, bringing buyers and sellers together to close deals with transaction values of less than $25 million

Dell committee seeks information on Icahn offer

ROUND ROCK, Texas — Mon May 13, 2013 8:22am EDT
(Reuters) – The special committee of Dell Inc.’s board on Monday asked Carl Icahn for details of his plans for the computer maker, including how he would finance his offer and who would run the company.
Last week Icahn and Southeastern Asset Management Inc. offered $21 billion in cash for Dell, challenging founder Michael Dell’s $24.4 billion bid to take the company private.
Michael Dell and private equity firm Silver Lake want to take the company private for $13.65 per share, but stockholders, including Southeastern and T. Rowe Price, have complained that the offer severely undervalues the company.
Instead, Icahn and Southeastern, two of Dell’s biggest investors, proposed to give stockholders $12 of cash for every share they own, as well as allow them to keep their stock.
But in a letter to Icahn, the committee said it was not clear if he intended to make “an actual acquisition proposal that the Board could evaluate” or if he intended his offer as an alternative in the event the pending sale to Silver Lake and Michael Dell is not approved.
The committee also asked for information on the terms of the debt financing required for Icahn’s proposal and “contingencies available if cash on hand or stockholder rollovers are less than anticipated,” as well as financing commitment letters.

Dell investors may still gain after Blackstone pullout: Barron’s

NEW YORK, Mon Apr 29, 2013 — Dell shareholders could still stand to profit even after Blackstone Group LP withdrew its bid to buy the world’s No. 3 personal computer maker more than a week ago, Barron’s said.

On April 19, Blackstone’s move knocked Dell shares to a two-month low and narrowed the fight for Dell between activist investor Carl Icahn and the company’s founder Michael Dell and Silver Lake Partners, the newspaper said.

Blackstone dropped its bid for Dell at $14.25 a share, citing deteriorating demand for PCs.

On Friday, Dell’s stock closed at $13.35, below the $13.65-a-share proposed buyout from its founder and Silver Lake.

“Dell shares now look appealing because investors stand to make a small profit if the Michael Dell-led offer gets approved,” the paper said in its April 29 edition.

Icahn and Southeastern Asset Management, Dell’s largest independent shareholder that complained the buyout offer being too low, have valued the company at more than $20 a share, Barron’s said.

Icahn proposed in early March, about a month after the Dell/Silver Lake’s announced its bid, for a $9-a-share special dividend. He has not made a formal offer for Dell, which Barron’s said could involve a tender of 58 percent of the PC marker’s stock at $15 per share.

If a Icahn offer does not emerge, Wall Street analysts reckon Dell might fall as low as $10 a share, the paper said.

The planned buyout, which has angered Southeastern and other major investors, faces a tough shot of being approved, excluding its founder who owns 16 percent of the company, according to the paper.

If Dell/Silver Lake bid fails, it will be “welcome news for Dell investors, who could then benefit from alternatives that offer immediate and long-term benefits that probably far exceed $13.65 a share,” Barron’s said.

Dell to go private in $24.4 billion deal

NEW YORK, Tue Feb 5, 2013 — Computer maker Dell Inc. will go private in a $24.4 billion deal that also involves Microsoft Corp. and private equity firm Silver Lake, the parties said on Tuesday.

Company founder Michael Dell and Silver Lake are paying $13.65 per share in cash for the world’s No. 3 computer maker.

The deal is being financed by cash and equity from Michael Dell, cash from Silver Lake, cash from Michael Dell’s investment firm MSD Capital, a $2 billion loan from Microsoft and debt financing from four banks.

The transaction is expected to close before the end of the second quarter of Dell’s fiscal 2014.

News of the buyout talks first emerged on Jan. 14, although they were reported to have started in the latter part of 2012. Michael Dell had previously acknowledged thinking about going private as far back as 2010.

The $13.65-per-share price is a premium of about 24 percent to the average of $11 price at which Dell stock traded before news of the deal talks broke and is far below the $17.61 that the shares were trading for a year ago.

Dell has steadily ceded market share in PCs to nimbler rivals such as Lenovo Group and is struggling to re-ignite growth. That is in spite of Michael Dell’s efforts in the five years since he retook the helm of the company he founded in 1984, following a brief hiatus during which its fortunes waned.

Microsoft to invest $2 billion in Dell buyout

NEW YORK, Mon Feb 4, 2013 — Talks between Dell Inc. and a consortium led by its founder and chief executive Michael Dell to take the world’s No.3 PC maker private were still on track on Monday, with negotiations focusing on a price of between $13.50 and $13.75 per share, a person familiar with the matter said.

Talks are in their final stages and an outcome is expected soon, the person said, cautioning that no final agreement had been reached and negotiations could still break down.

Microsoft Corp. is expected to invest around $2 billion in the deal, while private equity firm Silver Lake is expected to put in about $1 billion, the source said. Michael Dell is expected to roll over his roughly 16 percent stake and put in some of his own money so he has control of the company, the source added.

Dell and Microsoft did not immediately respond to a request for a comment while Silver Lake declined to comment.

Dell in talks to go private, shares surge

NEW YORK/SAN FRANCISCO, Mon Jan 14, 2013 — Dell Inc. is in talks with private equity firms on a potential buyout, two sources familiar with the matter told Reuters, confirming reports that sent shares in the world’s No. 3 PC maker soaring 13 percent to nearly a eight-month high.

The firms are now holding discussions on a deal with billionaire CEO and founder Michael Dell, who owns about 14 percent of the company, according to one source with knowledge of the matter.

The Wall Street Journal cited unidentified sources as saying TPG and Silver Lake could team up on an offer, possibly in conjunction with other investors such as pension funds. JPMorgan Chase & Co. was also involved in the negotiations, it added.

The first source told Reuters any potential deal could be structured as a management-led buyout with Michael Dell at the helm.

Talks had progressed for two to three months, heating up in late 2012, and a deal could be reached in six weeks, the Journal cited sources as saying.

Dell’s outlook disappoints as PC market falters

ROUND ROCK, Texas, Wed Aug 22, 2012 – Dell Inc. warned of a challenging second half and slashed its full-year earnings outlook as customers cut back on computer purchases ahead of the launch of Microsoft’s Windows 8 software, sending its shares down more than 4 percent.

Dell – once the world’s top PC maker and a pioneer in computer supply chain management – is struggling to defend its market share against Asian rivals like Acer Inc and Lenovo, and the fast-growing adoption of tablets like Apple Inc’s iPad.

Founded by CEO Michael Dell, it is in the midst of a turnaround, juggling acquisitions to bolster growth with the need to fatten margins by trimming expenses even as global tech spending appears to be slipping. In May, it warned that global tech spending is weakening faster than anticipated.

The No. 2 U.S. PC maker on Tuesday forecast revenue would slide 2 percent to 5 percent in the fiscal third quarter from the second, to $13.8 billion to $14.2 billion. That lagged Wall Street’s target of $14.85 billion.

It is predicting earnings per share of “at least” $1.70 for fiscal 2013, compared with a previous forecast for more than $2.13.

Dell to buy Quest Software for $2.4 billion

ROUND ROCK, Texas, Mon Jul 2, 2012 – Dell Inc. will buy enterprise management software maker Quest Software Inc for $2.4 billion in cash.

Dell’s $28-per-share offer for Quest trumps private investment firm Insight Venture Partners’ latest offer of $25.75 per share.

Quest shares closed at $27.81 on Friday on the Nasdaq.

Dell’s weak computer forecast draws price target cuts

ROUND ROCK, Texas, Wed May 23, 2012 – Dell Inc.’s weak forecast and disappointing quarterly results triggered price target cuts from a slew of brokerages on the stock of the world’s No.3 personal computer maker.

Shares of the company were down about 13 percent at $13.13 in premarket trading.

Dell said it expects its revenue to grow 2 to 4 percent to between $14.7 billion and $15 billion for the current quarter, well short of the $15.4 billion analysts had been expecting on average.

A cautious IT spending environment and challenges in its PC business will keep dogging Dell in fiscal 2013, BMO Capital Markets analyst Jung Pak wrote in a research report and cut the price target on the stock to $16 from $18.

Dell’s first-quarter earnings and revenue were also lower than expected, hurt by weak sales to consumers, large enterprises and government units. Mobile devices like the iPad have hit demand for PCs.

Dell to buy network security products maker SonicWall from Thoma Bravo

ROUND ROCK, Texas, Wed Mar 14, 2012 − Dell Inc. said it would buy network security products maker SonicWall from an investor group as the world’s No. 3 personal computer maker tries to tap growing demand to protect corporate networks.

Dell is trying to boost profit margins by focusing on being a one-stop shop for business customers by adding products in areas including security, storage and cloud computing so it can rely less on the PC business for which it is best known.

“There’s an opportunity to have higher growth margins and higher operating margins,” FBN Securities analyst Shebly Seyrafi said.

This is the first deal for Dell after John Swainson took over as its software chief last week with a mandate to expand its software capabilities. Swainson said it had been in the works long before he had been hired.

Though financial terms were not disclosed, investors and analysts are estimating the purchase price to be between $1 billion and $1.5 billion.

On a conference call with analysts, Dell said it will fund the deal with cash but declined to divulge the purchase price.

SonicWall was a public company until 2010, when it was acquired by an investor group led by Thoma Bravo for $717 million.