Who Is Interested in Dell Going Private?

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Jose Vasquez
Jan 16, 2013
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As probably most of those interested in Dell (DELL, Financial) already know, there is a possibility that it will go private. Supposing that is the case, it is worth thinking about who could be interested in this deal going through. For this reason I made a small list of the possible interested groups:

1) All the shareholders, institutional or retailers, who bought at low levels and want to get out relatively fast at a premium.

2) The private equity firms clearly are interested; that is the reason they are in talks to buy it.

3) The one whom few are talking about is the CEO and 16% owner: Michael Dell. Michael Dell could be considered one of the private equity partners, maybe even the bigger one. After all, he has more or less $15 billions of net worth. His net worth is as big as his company's market capitalization value just a few days back. He is one of the richest men on the planet ranking high on the Forbes list of billionaires. With only a fraction of his net worth he could put the whole equity part of the deal. With his big ownership not many votes would be needed to approve the deal. He also has investing experience via his MSD Capital hedge fund which has reportedly been quite successful.

Michael Dell, already a major owner, has been buying shares of his company in the last few years at even higher prices than now. As a billionaire and founder, if he decides to put equity into the deal he could end up owning north of 40% of the shares of the private company, maybe even more. Once private the dividend could be cut in order to pay the bank and the bond holders. That could cover a substantial part of the interests. Specially if the deal is done at low interest rates. Not strange at all these days, thanks to the governments zero interest rates policy, where many junk bonds yield hardly above inflation. That said it might not be easy to pull off the deal at low prices due to the possibility of competitive offers or of lawsuits from shareholders against the board of directors.

If I represented Silver Lake or another of the undisclosed private equity partners, I might be interested in Michael Dell remaining to run the company. I do not think it is clearly advantageous to replace him as CEO.

Given that possibility, the ones that would not benefit are all those who invested at prices substantially higher than today. Considering the current low historical levels of the stock price, many could fall in that category.

The important fact to note is that as a shareholder with the intention to remain at his company or even increase his ownership, Michael Dell would be interested in taking his company private as cheaply as possible. In other words, in paying as little as possible for it. Therefore, his personal goal could be making the cheapest possible deal for the rest of the public shareholders. That would allow him to remain owner, with a much bigger ownership, and his fellow owner(s) would be some private equity firm(s), instead of institutional and retail public investors. He would have increased power and could execute freely without having to live under the pressure of being a public company.

The situation reminds me when Warren Buffett years ago bought Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial). The big difference then was that he warned investors not to sell if they did not want. They were explicitly told that he would buy their shares because he considered them to be cheap.

With a deal or not, this could be taken as a sign that the company is not shareholder friendly. It might not be doing its shareholders a favor by letting a deal go through at a cheap level. The bad consequences are also for employees who probably feel more insecure now. It could also explain why so many good high-level managers have left Dell lately.

Being a current shareholder, it is beneficial to do this kind of exercise to understand the incentives of the related parties. If Michael Dell is really interested in remaining in the company as CEO and equity owner, this could be an opportunity for him to buy back his company at a low price and remain on the helm. Under that scenario the one more interested in the private equity deal going through could be the current owner/CEO himself, and shareholders expecting to get high prices could be disappointed.

Disclosure: Long Dell (my portfolio)
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I was born in Spain and lived in France, Chile, USA and Belgium. I used to work in IT and Banking. I am a family man, I have a lovely wife, 3 sons and one step daughter. I have humble tastes, I like to stay home and read about companies. I started investing before the internet bubble. I knew little and liked technical analysis so my results were bad. Fortunately I did not have much to lose. Some years later in 2006, bored of doing real state investments, I opened an interactive brokers account and restarted. This time, not wanting to make mistakes, I decided to follow a model: Warren Buffett, he was at good making money via stocks. So I started reading about him, his shareholders letters, the books that he recommended, etc... I started applying his principles, reading 10K's digesting all sources of information. I started buying good and cheap companies to hold forever unless something changed fundamentally. When the housing crisis started I was 75% cash. By then I had identified good companies at very cheap prices so I invested most of my savings in stocks. It doubled fast. By the second semester of 2009 I turned my software company into an investment vehicle and dedicated myself full time to it. I changed lifestyle and moved from Belgium to the beach, Brazil, north east coast (www.kuchita.com). The goal was to keep fixed costs low in order to be able to live with a minimum 6-8% yearly return, to move away from the inhuman life of civilization and to have some peace and sunny weather. Now I can think and study about companies 60 hours/week. I can finally do what I want full time and can say that I have never been so happy, specially also with my just born 4th son, my other great kids and my sweet wife who supports me fully while I study most of the day and patiently wait for the opportunity to make a swing ! My portfolio is disclosed here: http://www.kuchita.com/view/sumo.php For more: