Under the terms of the agreement, Dell stockholders will receive $13.65 in cash for each share of Dell common stock they hold, in a transaction valued at approximately $24.4 billion. The price represents a premium of 25 percent over Dell’s closing share price of $10.88 on Jan. 11, 2013, the last trading day before rumors of a possible going-private transaction were first published; a premium of approximately 35 percent over Dell’s enterprise value as of Jan. 11, 2013; and a premium of approximately 37 percent over the average closing share price during the previous 90 calendar days ending Jan. 11, 2013. The buyers will acquire for cash all of the outstanding shares of Dell not held by Mr. Dell and certain other members of management.As of Jan 31, 2013, Dell has $14.82 billion worth of cash and short term investments and $9.25 billion of short term and long term debts. At the buyout price, dell sports an enterprise value of $18.83 billion and a EV/Ebidta valuation of only 3.5, substantially similar to the valuation of HP and less than half of well run companies like IBM.
It is a popular misconception that private equity companies are in the business of buying troubled businesses and fixing them. In the stock market hay days of 2007, both Harmon and Penn National Gaming were offered buyout deals at the peak of their then respective prices. Of course, neither companies needed any fixing. In the capital market, equity requires a higher return compared to fixed income securities. Private equity is all about arbitrage between those two types of asset classes. So its business model is not so different from your importer who buys shoes from Vietnam or your exporter who sells wines in China. So long as your business can earn a greater return than your borrowing cost, your equity value will be enhanced. Of course, if you can somehow improve the acquired business, that will just be gravy.
In the press conference, Michael Dell purportedly claimed that it would be easier for him to turn around Dell without the glare of public investors and the pressure of quarterly earnings target. Of course, the goals of both Dell and HP are to become IBM. To get there, Dell has been making acquisitions. Without the currency of the public float and a more leveraged balance sheet, it seems to me the task gets more difficult, not easier. The Dell privatization happened because of the confluence of an extremely undervalued stock and an enthusiastic credit market for the benefit of Silver Lake partners and Dell's management. To quote Jerry Seinfeld, "Not that there is anything wrong with that." This is capitalism afterall. As soon as Dell becomes a private company, substantial dividends will be paid to the new equity holders both out of existing cash on balance sheet and Dell's ample free cash flow. I am aware that Dell's cash holdings are substantially in foreign jurisdictions and can not be repatriated without tax consequences. I believe a way will be found around this issue.
The most obvious loser in Dell's privatization, yet hasn't be pointed out all that frequently, are Dell's public debt holders. For example, Dell's 6.5%38 notes were trading at 116 before story of its buyout broke. It now trades at 89. By agreeing to a leveraged buyout, Dell's credit rating will certainly fall to junk status. So the 6.5%38 note holders have just saw a 23% drop in asset value. But I believe the public stock holders were also losers. Dell is in a mature business and pretending to be a growth company. Had Dell been run primarily as a business with substantial free cash flow and paid a higher dividend, let's say $1 per share, I believe Dell's stock price would have been much higher that even the current buyout price of $13.65. Even at $1 dividend rate, Dell still would have ample cash flow to pursuit acquisition, not to mention a much higher stock as currency.
So once again, both public stock and debt holders were screwed. Ain't that always the case.
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