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Dell to Sell Itself for $24.4 Billion - WSJ.com

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URL:http://online.wsj.com/article/SB10001424127887324900204578285582125381660.html


Dell Inc. on Tuesday said it reached a deal to take itself private, in a $24.4 billion buyout that marks an unofficial end to the era when a handful of young entrepreneurs made PCs the dominant computing device.

Reuters

Dell founder and chief executive Michael Dell.

Dell said it has agreed to be taken private by a group led by founder Michael Dell, in a deal valuing the computer giant at $24.4 billion. Deal Journal's David Benoit joins Markets Hub. Photo: Getty Images.

The deal "immediately delivers value to shareholders," Brian Gladden, Dell's chief financial officer, said in a brief interview. He said that while Dell had made progress in its effort to turn itself around, "we do recognize that it will take more time" and that the computer maker can more easily make the necessary changes without the scrutiny and limitations of being a public company.

The buyout reflects the combined heft of founder Michael Dell, software titan Microsoft Corp., private-equity firm Silver Lake Partners and a handful of investment banks.

Mr. Dell—along with Silver Lake—will offer Dell's holders a per-share price of $13.65, a 25% premium above the level shares traded last month ahead of media reports about a potential deal.

Timeline: Dell's Ups and Downs

From Public to Private ... and Back?

Read about corporate founders who decided they would rather take their companies private, including Mr. Dell.

The transaction will be financed through a combination of cash and equity contributed by Mr. Dell, cash funded by investment funds affiliated with Silver Lake, cash invested by MSD Capital L.P., a $2 billion loan from Microsoft, rollover of existing debt, as well as debt financing that has been committed by Bank of America Merrill Lynch, Barclays, Credit Suisse and RBC Capital Markets, and cash on hand.

Mr. Dell first approached the board of directors about a buyout in August, according to the company. "The board went through a very disciplined and structured process," Mr. Gladden said.

The merger agreement provides for a "go-shop" period—initially for 45 days—during which Dell can actively solicit alternative proposals. The buyout group would get a termination fee of only $180 million if Dell strikes a deal with competing bidder during the go-shop period. For a bid outside of the go-shop period, the buyout group would get a $450 million fee.

Some stockholders aren't happy about the deal. James Rosenwald, managing partner at Dalton Investments LLC, said he believes Dell shareholders could do better if the company borrowed money and paid shareholders a large one-time dividend. The hedge fund reported owning 1.1 million Dell shares as of Sept. 30.

Analysts at ISI Group, an investment research firm, said in a note Tuesday that the deal's price may be "perceived as cheap" and that "the deal could face some shareholder resistance at any price under $15 a share." But the analysts also said the deal makes sense for Dell and added they see no other bidders emerging in the go-shop period.

Less than two hours after the deal was announced, rival Hewlett-Packard Co. was quick to criticize the takeover, saying the buyout would add uncertainty for customers and limit Dell's ability to invest in new products.

"Leveraged buyouts tend to leave existing customers and innovation at the curb," H-P said in a press release. "We believe Dell's customers will now be eager to explore alternatives, and H-P plans to take full advantage of that opportunity."

Dell will continue to be based in Round Rock, Texas. The deal is expected to close in the second quarter of Dell's 2014 fiscal year.

Mr. Dell, who owns about 14% of Dell's shares, will continue to lead the company as chairman and chief executive. He will continue to hold a significant stake in Dell by contributing his shares of Dell to the new company, as well as making a substantial additional cash investment.

Dell was once the world's largest PC maker and boasted a market capitalization above $100 billion. But it largely has been sidelined as tablets and smartphones became the more popular devices and PC sales shrank.

Mr. Dell, 47, who started the company in 1984 in his dorm room at the University of Texas, is the sole executive among a cast of entrepreneurs still running a company that spawned the PC revolution.

Among the others who built empires from PCs were Microsoft's Bill Gates, Gateway Inc. founder Ted Waitt, and Apple Inc. co-founders Steve Wozniak and the late Steve Jobs.

PCs still account for about half of Dell's revenue, and restructuring that business in ways that could sharply reduce its top line and potentially alarm investors might be easier as a private company, analysts and people involved in the transaction say.

Dell's PC business is a key to maintaining relationships with companies that buy other products. It also brings Dell volume discounts on components that are also in other products, such as servers.

The shift away from PCs also has posed a problem for Microsoft, whose Windows operating system powers most PCs but hasn't made much of a dent with other types of devices. An investment in Dell could help stabilize one of the software giant's key distributors and ensure that Microsoft has a major channel for Windows.

Leveraged buyouts are funded with a relatively small percentage of cash put up by private-equity investors and their partners, and a typically much-larger percentage of new debt, which becomes the burden of the company being bought. The borrowings ultimately are to be repaid with funds generated by the company's operations or the sale of its assets.

Dell generates several billion dollars a year from operations, so investors thus far have viewed it as capable of paying off its debt.

Big LBOs were in fashion about six years ago, a period that saw multiple buyouts above $20 billion, including those of Hilton Hotels Corp. and First Data Corp.

But such sizable deals haven't emerged since the recession, when some buyout targets struggled under the weight of their deal-generated debt loads as the economy turned.

Lately, with interest rates so low for so long, investors in debt markets have become hungry for deals like buyouts that can offer attractive yields. Private-equity firms can get better returns on their money when the debt they can raise for buyouts is relatively inexpensive.

At the same time, some say the Dell deal won't necessarily usher in a wave of big private-equity pursued buyouts. This deal, for example, was aided by the investment by Microsoft—help not every buyout firm can regularly tap.

—Shira Ovide, David Benoit and Ian Sherr contributed to this article.

Write to Ben Worthen at ben.worthen@wsj.com, Anupreeta Das at anupreeta.das@wsj.com and Saabira Chaudhuri at saabira.chaudhuri@wsj.com


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