Now that Dell Inc. (NASDAQ:DELL), the No. 3 PC maker, has announced its $24.4 billion leveraged buyout, the fifth-largest ever, without providing much of a rationale, could that be a signal to other companies that private equity companies are waiting for more?
The answer is both yes and no.
On one side, technology companies headed by Apple Inc. (NASDAQ:AAPL), the most valuable technology company, are swimming in cash. Apple’s $137.1 billion hoard is the most egregious, an indicator the Cupertino, Calif., company can buy anything it wants.
Other technology giants including International Business Machines Corp. (NYSE:IBM), the No. 2 computer company, and Oracle Corp. (NASDAQ:ORCL), the No. 1 database company, have already announced plans to acquire other, smaller companies in 2013.
One the other hand, executives like Michael Dell, 47, have spent decades building their companies and fortunes and realize that calling in a specialist in private equity, such as Silver Lake Partners, which has more than $16 billion available at any time, can be a good deal. A good P/E firm can always raise more money, exactly what it plans to do raising about $15 billion from a bank syndicate.
Dell, who has skin in the game because he owns 15.7 percent of his Round Rock, Tex., company, has watched the share price plummet 43 percent since 2003 and 24 percent in the 52 weeks before the deal was announced on Tuesday. Going private will relieve management from discussing performance with investors four times annually and give it breathing space.
Mikako Kitigawa, chief PC strategist for Gartner Inc. (NYSE:IT), said going private can allow Dell to focus on going upscale, selling software and services. Or he could decide to “double down” and try to beat low-cost Asian rivals like China’s Lenovo Group (PINK:LNVGY), the No. 1 PC maker, at their own game by shaving PC margins like he did almost 30 years ago.
“As a public company, he can’t settle for a 2 percent gross margin anymore,” she said. “But as a private one, he has different options.”
Some companies have gone private and appear to be very happy that way. SunGard Data Systems, one of the top technology providers to Wall Street as well as to higher education, went private in what was then the biggest technology buyout in 2005. Among the players in the $11.3 billion deal was Silver Lake, including Managing Director Egon Durban, who’s going to be Dell’s de facto “minder.”
SunGard, of Wayne, Pa., has sold large parts of the company and made substantial acquisitions, all the while paying down much of the debt it assumed in the LBO. All companies that go private finance their debts from in-house cash flow as well as by cutting costs and from divestitures.
Other technology companies conducted their LBOs before the 2008 recession and haven’t indicated they want to go public again. They include First Data Corp., the payments processor, which did a $26.4 billion deal, as well as Alltel, a wireless company, for $25.7 billion.
Much of Alltel has been acquired by AT&T Inc. (NYSE:T), the No. 1 telecommunications carrier, and the Verizon Wireless unit of Verizon Communications Inc. (NYSE:VZ), the No. 2 telecommunications carrier.
The top technology companies are constantly shuffling their portfolios.
In late December, Hewlett-Packard Co. (NYSE:HPQ), the No. 1 computer company, advised the Securities and Exchange Commission it was considering “possible disposition of assets,” although CEO Meg Whitman has said it plans no major activity after deciding to retain its PC unit, which is No. 2 worldwide, and merging it with the printers division, No. 1 worldwide. It's not considering an LBO, a representative said.
IBM, which constantly acquires companies, has divested units in the past to P/E companies. Most notable: its printers division to Clayton Dubilier & Rice, which then took it public as Lexmark International Group (NYSE:LXK). Intel (NASDAQ:INTC), the No. 1 semiconductor maker, sold its LANDesk unit to P/E specialist Thoma Bravo, which maintains it as LANDesk Software, in South Jordan, Utah.
“Dell probably decided to go private now because it wants to decide what it wants to be when it grows up,” said an investment banker who’s not involved in the Dell deal, which includes financial advisers JPMorgan Chase (NYSE:JPM) and Evercore Partners (NYSE:EVR).
They’ve already benefited from the deal, in which fees are estimated to range as much as $400 million, once all the banks, lawyers and accountants are paid. Then Silver Lake will make money for the duration.
Private equity companies, also including Bain Capital, founded by Mitt Romney, the 2012 Republican nominee for president; Kohlberg Kravis Roberts (NYSE:KKR), which managed the 1988 takeover of RJR Nabisco for the then-record $25.1 billion; Blackrock Partners (NYSE:BX) and TPG Group, among others, have billions available for deals.
They also are looking for fee-based income. LBO activity fell to only $100 billion in 2012, compared with $410 billion in 2006, estimates Dealogic, a private research firm.
As well, interest rates now remain low, so that a well-managed company could try a buyout, then tap markets cheaply for loans.
Last May, Quest Software, of Aliso Viejo, Calif., decided on a $2 billion LBO to be managed by Insight Venture Partners before Dell swooped in to offer $2.4 billion and acquire the company. So just by announcing a buyout, a company like Dell, which has a provision allowing for a better offer to emerge within 45 days, could be acquired, but only by parties willing to spend more than $24.4 billion.
Dell already has a $2 billion commitment from Microsoft Corp. (NASDAQ:MSFT), the No. 1 software company, for its LBO, so it would be hard to imagine another party challenging it, at least without partners.
Going forward, the signs for an LBO are clear: a company’s declining share price, proven management and a desire to change. Wall Street and P/E sales people know how to ring CEO doorbells.
Shares of Dell rose a dime to $13.52, 13 cents below the LBO price, in Wednesday trading.
David Zielenziger is a veteran editor and journalist who has written for newspapers including the Baltimore Sun, Asian Wall Street Journal and EETimes, as well as for...