Michael dell backs up his buyout plan with $750 million in cash
Michael Dell really does seem fully committed to his plan for rebuilding Dell. Reuters reports that Dell and his investment firm have committed $750 million in cash to help secure the buyout of the company he founded back in 1984. Under the terms of the buyout, Dell is contributing $500 million of his own money while his MSD Capital firm will pitch in another $250 million. Dell earlier this week put the finishing touches on a $24.4 billion deal to take the company private after he enlisted the help of Silver Lake Partners and Microsoft, which together have committed $3.4 billion to help buy out the firm. Most of the deal is being financed by several banks providing debt totaling around $13.75 billion and by Dell’s own 16% stake in the company.
02-07-2013 10:33 PM
Dell offers glimpse of its post-buyout life
There is a lot yet to be told about how going private will change Dell, but one thing it won’t change is its enterprise strategy.
With its US$24.4 billion buyout, Dell’s enterprise strategy “does not change,” Jess Blackburn, a spokesman for the company said in an email. “And by becoming a private company, we can more effectively proceed executing that strategy.”
There is little reason for Dell to say otherwise. Dell’s enterprise software and services revenue is increasing as it expands its end-to-end offerings.
If anything, Hewlett-Packard indirectly validated Dell’s enterprise abilities by calling attention to them. HP warned Dell’s enterprise customers on Wednesday that “leveraged buyouts tend to leave existing customers and innovation at the curb.”
One person who won’t be waiting at the curb for a ride from HP is Tom Glaser, vice president for IT at Howard Community College in Columbia, Maryland. He’s happy with the Dell.
The college, which has some 13,000 students, has a major investment in Dell products, which have “proven to provide quality and reliability,” as well as good customer support. He expects Dell will strive to provide the same customer service levels post buy-out.
“Good business and customer partnerships are earned over time and experience, so their competitors would need to do more than just pick us up at the curb,” said Glaser.
Dell has been working to win customers such as Glaser. Two years ago it held it first large user conference, which Glaser attended. These conferences, most recently in December, have been forums for Michael Dell to demonstrate how his firm is integrating its hardware with new services and software.
Dell’s strategy appears to be succeeding. Dell’s enterprise services and software business now comprise over a third of its revenue, and over 50% of its gross margin, an increase from last year, said David Mehok, executive director of investor relations, at a conference last month. Dell is scheduled to hold a conference on Feb. 19 to discuss the fourth quarter and full year.
Dell’s strategy is apparent in its acquisitions. Just last year it bought thin client maker Wyse, and is set to launch a thumb drive-like computing device with multiple uses. It also bought the mainframe migration firm Clerity Solutions and the security firm SonicWall, among others.
Dell’s new ownership structure may create some uncertainty about the vendor’s direction, but one Dell customer, James Bottum, the CIO of Clemson University, said that’s something they’ve been dealing with for a long time.
“Dell is in transition, and the transition has been going on for some time,” Bottum said. The company is far from being the PC maker it once was, he said. They are working, for instance, with Dell on a cloud-based HPC system.
“We like Dell,” said Bottum. “We feel we got a good partnership and feel they are very adaptable — I’m not afraid to bet on them.”
Analysts are telling Dell customers to pay close attention until the company makes its plans clear.
Much of the speculation about the impact of the buyout is over the low-margin PC division, and particularly the consumer part of the Dell’s business. While hardware is still Dell’s major revenue generator, its path to higher margins is through enterprise software and services.
Crawford Del Prete, an industry analyst for IDC, expects Dell to continue on with its enterprise strategy. “They are probably just going to try to do it faster,” he said.
“This announcement is a good thing for enterprise customers,” said Del Prete, “because Dell is going to become more focused on the enterprise and creating value in the enterprise.” That’s because those are more profitable areas, he said.
By going private, Dell won’t have to explain itself to Wall Street every quarter and can spend cash as they want, said Frank Gillett, an analyst at Forrester Research. “They can take chances and not be exposed to getting beat up in the financial markets,” he said.
But that doesn’t mean that Dell will have a smooth ride. Adrian O’Connell, a Gartner analyst, said HP’s statement about Dell is a good example of the challenges that Dell is going to face, namely the “fear, uncertainty and doubt that’s going to be thrown around for a while.”
“The difficultly, certainly for customers, is that there are a lot of unknowns out there,” said O’Connell. He expects a degree of caution until Dell “is really able to clearly reaffirm its strategy and articulate what its priorities are moving forward.”
The customer strategy will depend on where Dell makes its technology investments, said O’Connell, but enterprise customers should have a “reasonably good degree of confidence.”
To HP’s point that the cost of buyout will burden Dell, Charles King, an analyst at Pund-IT, discounted the issue. “If you’re going to borrow billions of dollars, there couldn’t have been a better time to do it than now,” he said, referring to low interest rates.
Dell threatened with ‘years of litigation’ over buyout plan
There are probably days when Michael Dell regrets ever taking his company public. AllThingsD reports that famed activist investor Carl Icahn says that there will be “years of litigation” ahead for Dell if it goes through with its current buyout plan without making substantial changes. In particular, Icahn wants Dell to “pay a special dividend of $9 per share” to investors if they decide to vote down Dell’s proposed plan to go private later this year. Icahn says that this “proposed $9.00 special dividend gives Dell shareholders a total value of $22.81 per share, representing a 67% premium to the $13.65 per share price proposed” in the original plan. Of course, increasing the potential cost of the buyout by 67% would greatly complicate things for Dell, which has inked a delicate agreement with Silver Lake Partners, Microsoft and several banks who are financing debt for the transaction.
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