The year Dell went private

Linda Endersby looks back on one of the big stories of the last twelve months

At this time of year there are plenty of pantomines going on, keeping both children and adults enthralled with tales of golden geese, beanstalks or cats in boots. But in the IT world there was one story that had plot turns, cliffhangers and larger than life characters that managed to come close to challenging anything portrayed on the stage.

One of the main events of the year was the decision and move by Michael Dell to take the PC firm that he founded private. The plan seemed to be a fairly straightforward one with his belief that only away from the gaze and demands of Wall Street the firm would be able to make the transition to a services led business. The shareholders needed to be wooed but at the start there appeared to be no villain in the piece. But every good panto has its wicked wizard or rogue that provokes boos and cat calls and in this case billionaire investor Carl Icahn looked like he was auditioning for the role.

Icahn wanted to fight Dell and thwart the private plans and until almost the end he gave it a good run, calling on legal means and even staging his own rival bid to try and beat his rival. To some he was the Prince Charming fighting off Michael Dell but others saw him as the person to boo. We all know now that Dell won out but as we look back over the events of this year it's worth remembering that it was a close run thing.

Following months of negotiation in the latter half of 2012 the prospect of Dell going private with an MBO backed by private equity and led by Michael Dell became a real possibility in January.

The PC firm's shares climbed on the back of reports that a deal to take the business private was nearing completion with Michael Dell, already owning 14% of the firm, planning to invest a large amount from personal funds to remain the figurehead.

In February Michael Dell confirmed that his intention buy back the PC maker in a deal worth $24.4bn (£15.5bn) As well as Dell Silver Lakes and four banks were confirmed as interested backers.

Dell penned an open letter to customers as rivals and shareholders started to circle the firm with HP warning customers of uncertainty. "We believe that our proposed new ownership will provide long-term support to help Dell innovate, invest for growth and accelerate our transformation strategy. We’ll have the flexibility to continue organic and inorganic investment and drive industry-leading innovation," wrote Dell.

"We’ve made solid progress over the past few years. Our leadership and our strategic execution have been consistent, as we’ve built a comprehensive portfolio to help you succeed. Secure, easy to manage, end-to-end solutions from the cloud to the datacentre to devices remain at the core of our value proposition to you," he added.

Dell signed off the letter with a promise to deliver success, but with some of the major shareholders expressing discontent, the opposition to his plans was still considerable.

One of Dell's largest shareholders, Southeastern Asset Management, with 8.5% vowing to fight the bid and expressing "extreme disappointment" over the proposed deal.

"We believe that the proposed transaction, under which Dell’s public shareholders would receive only $13.65 per share, clearly represents an opportunistically timed bid to take the Company private at a valuation far below Dell’s intrinsic value, and deprives public shareholders of the ability to participate in the Company’s substantial future value creation," the letter stated.

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At the end of February the yearly results showed revenue for the year down by 8% to $56.9bn and net income fell by 32% to $2.3bn compared to a year earlier.

Every product line apart from servers and networking declined in the fourth quarter and the performance by the business units was also littered with down arrows with large enterprise declining 7% in Q4, public sector down 9%, SME turnover dropping 5% and consumer sliding 24%.

Michael Dell did not comment on the results, with Brian Gladden, Dell CFO, instead talking through progress on the long-term strategy of moving the business to enterprise solutions and services.

In March a billionaire investor and well-known shareholder entered the public discussions on the proposals to take the firm into private hands. Carl Icahn penned a letter to Dell, which the firm then disclosed, demanding that the PC maker spend $15.7bn in special dividends to appease those shareholders that didn’t think they were being given good enough value under the offer.

"We are substantial holders of Dell Inc. shares. Having reviewed the Going Private Transaction, we believe that it is not in the best interests of Dell shareholders and substantially undervalues the company," stated the letter.

"We believe, as apparently docs Michael Dell and his partner Silver Lake, that the future of Dell is bright. We see no reason that the future value of Dell should not accrue to ALL the existing Dell shareholders - not just Michael Dell," it added.

Dell pointed out it was still prepared to look at alternatives to the private plans tabled by Michael Dell and Silver Lake and it welcomed Icahn and others to take part in that process: “Our goal is to secure the best result for Dell’s public shareholders - whether that is the announced transaction or an alternative.”

By the end of the month that gauntlet was taken up with rival bids in the offing from Blackstone Group and Carl Ichan. The bids were both expected to keep a portion of the company remaining public with Icahn offering $15 per share and Blackstone around $14.25 which both beat the $13.65 offered by Silver Lake and Dell.

By the end of March the chance of a tie-up between the rival bids became a possibility after Icahn indicated he would work with Blackstone and preliminary talks began between the two contenders.

In early April as the pressure mounted, Michael Dell outlined what could happen to the firm he founded if his bid to return the business back into private hands managed to get the backing of the board and shareholders, with the channel a main plank of his strategy.

The plans, in a memo to staff talked of making "significant investments in research and development, capital expenditures and personnel additions" and went on to deal directly with the channel.

Not always been a channel aficionado the memo showed Dell had realised the benefits to be delivered through the indirect model. "Our goal is to increase sales coverage and expand the depth of partnerships with channel partners in our Partner Direct program. We also expect to significantly increase investment in training for both new and existing sales personnel, including our channel partners," the memo stated.

With Blackstone leaving the bidding process in April, Icahn joined with Southeastern Asset Management to make a  $21bn cash offer at the end of the month and the ball was placed firmly in the billionaire’s court as he was asked to prove his funding.

Icahn had stated on US television there would be no board role for Michael Dell if his bid won and he questioned whether his opponent could actually get his hands on the funds for his $24bn bid.

In a letter from the board Icahn was challenged on both these statements with proof of funding asked for, along with further information on his structural plans.

"Please provide comprehensive information regarding the proposed financing for the transaction. We need to understand the terms of the debt financing, and contingencies available if cash on hand or stockholder rollovers are less than anticipated. We would also need to see drafts of forms of commitment papers (and any proposed bridge facility) so that we can assess the certainty of closing," stated the letter.

"Please identify the persons you would expect to form the senior management team of Dell following the transaction, and what role these persons would play in arranging the financing for the proposed transaction,” the letter continued. “Also, please provide us with a description of the strategy and operating plan you would expect this management team to implement."

Results announced mid month reported a 79% slide in profits and revenue also dropped 2% for the first fiscal quarter. A large proportion of blame was placed at the feet of the declining PC market with the end user computing unit reporting a 9% decrease in revenue with the desktop and thin client revenues dropping by 2%.

The latest numbers supported Michael Dell’s argument that the business should make the transition to a more services led business outside of the glare of the stock market.

In early June the Dell board backed Dell’s bid with a shareholder vote planned for 18th July. "A sale to the Michael Dell/Silver Lake group... is the best alternative available," the board wrote in an open letter to shareholders, "In a challenging business environment it offers certainty and a very material premium over pre-announcement trading prices."

"Having conducted a thorough and probing review of Dell's challenges and opportunities, we believe that the risks and uncertainty of a standalone public company are high and that the transaction we have negotiated offers superior value for Dell stockholders," it added.

In response, two weeks later Icahn stepped up the pressure offering to pay $14 a share if the shareholders would help him vote down the favoured proposal.

Icahn wrote to shareholders outlining his beef with the other offer: "Our proposal allows those who believe, like us, that the $13.65 price being offered in the Michael Dell-Silver Lake going-private transaction significantly undervalues Dell to continue to hold Dell shares."

The special committee at Dell overseeing the plans to go private process was dismissive of the bid.

"Mr. Icahn’s concept is not, in its present state, a transaction that the Special Committee could endorse and execute – there is neither financing, nor any commitment from any party to participate, nor any remedy for the company and its shareholders if the transaction is not consummated. In addition, the concept does not adequately address the liquidity issues and other risks the Committee previously highlighted," it stated.

A week later Dell revealed it had identified a potential $2.9bn shortfall in Icahn’s proposed takeover.

"Icahn has been inconsistent about per share cash to shareholders and aggregate cash proceeds," a Dell SEC filing stated, adding "Despite extensive due diligence over many months, Icahn has not secured committed financing for any of these schemes”.

On 2nd July it was revealed that Icahn had requested a meeting with the vendor to discuss funding for his bid having lined up $5.2bn of loan commitments to stem worries that the vendor's special committee had about the bid.

"With that we put an end to the unwarranted speculation by Dell that our money would not be available," Icahn said in an open letter to Dell shareholders.

But the influential Institutional Shareholder Services offered support for the bid from Dell and Silver Lake Partners saying the $24.4bn offer, worth $13.65 per share, transferred the risk of transforming the PC vendor and provided shareholders with a "certainty of value".

Egan-Jones Proxy Services and Glass and Lewis & Co followed the ISS lead and got behind the original offer.As the vote approached Icahn fought back offering shareholders the chance to get a bigger stake in the PC marker adding a warrant to the offer which would raise the value to $15.50 - $18 a share giving those with existing shares the chance to get hold of additional stock once the value of the firm's shares hit $20.

On the day of the proposed vote Dell postponed the shareholder ballot for 1 week after the offer by Icahn muddied the waters.The Special Committee issued a statement stressing no votes had been garnered before the decision to delay was made.

"Dell announced that today’s special meeting of stockholders was convened and adjourned to provide additional time to solicit proxies from Dell stockholders. No vote was taken on the proposed transaction prior to the adjournment," it stated.

However on the eve of the 24th Michael Dell and Silver Lake’s submitted a revised proposal improving the offer by $150m.

“This is our best and final proposal. We are not willing to discuss any further increase in the merger consideration,” said Michael Dell in a letter to the Special Committee of Dell’s board. Dell termed the revised proposal “fair and reasonable”.

In addition to the new bid, Dell requested a change to voting procedures so that abstainers would not count against his takeover. This was initially rejected by the special committee and Icahn threatened to block any changes with a legal suit.

Dell’s board postponed the shareholder vote until Friday 2 August 2013 to consider the new offer.

However on the morning of the 2nd it was announced that the special committee accepted the winner should get a majority of voting shares and not just win out because those that abstain get counted as against the Dell proposal. The vote was again postponed until 12th September.

On 9th September Carl Icahn revealed he would not pursue his bid in an open letter to shareholders that continues to criticize his rival's bid but revealed his intention to throw in the towel.

Icahn blamed a combination of factors for the decision to withdraw including the new bid from Dell and Silver Lake and the lack of legal support he got on the vote changing.

"We have therefore come to the conclusion that we will not pursue additional efforts to defeat the Michael Dell/Silver Lake proposal, although we still oppose it and will move to seek appraisal rights," he wrote.

"I realise that some stockholders will be disappointed that we do not fight on. However, over the last decade, mainly through “activism” we have enhanced stockholder value in many companies by billions of dollars. We did not accomplish this by waging battles that we thought we would lose. Michael Dell/Silver Lake waged a hard fought battle and according to Chancellor Strine, the actions by Dell were within the Delaware law. We therefore congratulate Michael Dell and I intend to call him to wish him good luck (he may need it)," he added.

"The Dell board, like so many boards in this country, reminds me of Clark Gable's last words in Gone with the Wind, they simply 'don't give a damn'," he concluded.

On 12th September with his rival out of the running the majority voted in favour of Michael Dell and his $24.9bn.

The move to take the firm private would take place as Dell's third quarter closed in October with shareholders getting $13.75 a share in cash and a $0.08 share dividend for Q3.

In a conference call after the shareholder vote Michael Dell said that there was still a long way to go and it had many challenges ahead but talked up the benefits of becoming a private company.

"Under a new private company structure, we will have the flexibility to accelerate our strategy and pursue both organic and inorganic investment without the scrutiny, quarterly targets and other limitations of operating as a public company," he said.

On 30th October the move was finalized and Michael Dell and investment firm Silver Lake Partners formally completed their $24.9bn (£15.5bn) acquisition.

“Today, Dell enters an exciting new chapter as a private enterprise,” said Dell. “Our 110,000 team members worldwide are 100% focused on our customers and aggressively executing our long-term strategy for their benefit.”

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