Dell executives in a regulatory filing are outlining a bleak financial future for the PC vendor in its efforts to win shareholder support for plans to take the company private.
In a 274-page filing with the U.S. Security and Exchange Commission (SEC), Dell officials talked about their four-year efforts to move the company’s focus away from its ailing PC business and toward its strategy to become a seller for enterprise IT solutions and services.
The documents show a company that is continuing to get financially battered by the downturn in the PC industry with tablets and smartphones continuing to steal away consumer and corporate technology dollars and little help coming from Microsoft’s Windows 7 and 8 operating systems. Founder and CEO Michael Dell and other company executives have argued that taking the company private would enable them to accelerate their efforts to transform the world’s third-largest PC vendor outside the glare of Wall Street analysts and the pressures to meet quarterly financial targets.
Michael Dell and equity firm Silver Lake Partners on Feb. 5 announced a $24.4 billion leveraged buyout plan that would include taking the company private. The plan called for buying outstanding Dell stock for $13.65 a share, a 25 percent premium over the price the stock was at Jan. 11, when leaks of a possible buyout plan first came out. The deal also includes a $2 billion contribution from Microsoft.
The plan has been under siege since. Some of the largest shareholders—such as Southeastern Asset Management and T. Rowe Price—balked at the deal soon after it was announced, saying the price was far too low and undervalued the company while benefiting Michael Dell and a few others. Those investors vowed to vote against it if the price wasn’t raised significantly. Southeastern officials reportedly said they saw a fair price being as high as $24 a share—and they were soon joined by outspoken investor Carl Icahn.
The board of directors, which had voted to support the deal, said in March that all options for Dell had been explored, that a buyout was the best alternative and that the $13.65 price was a fair one. However, since March 22, two other groups—one led by private equity firm Blackstone Group and another by Icahn—have made bids that are in the $14- to $15-per-share range, and the board’s special committee has said it will consider those.
Dell Makes Argument for Bid to Take Company Private
The new bids not only call into question the company’s future, but also Michael Dell’s future. The Silver Lake bid would keep Michael Dell in charge of Dell, but the other bidders reportedly would consider a leader other than Michael Dell. Bloomberg reported April 1 that Michael Dell, who owns almost 16 percent of Dell stock, has met with Blackstone Group executives and would only consider backing the firm’s bid if he were to remain CEO.
According to the documents filed with the SEC, Michael Dell approached the board with the idea of taking the company private in August 2012—two months after Southeastern officials first talked to him about such a plan. After that August meeting, the board created a special committee to oversee the buyout process, and in a series of meetings through the fall and into the winter, the panel met with such financial experts as J.P. Morgan to discuss the idea, and heard from Dell officials about the increasingly precarious state of the company.
Like other vendors tied to the PC market, Dell has seen its fortunes take a hit with the rapid growth in tablet and smartphone sales. Dell sells some tablets, but no smartphones. The hope of many of these companies—including Hewlett-Packard—was that Microsoft’s release in October 2012 of Windows 8 would boost PC sales. However, the OS did not give the hoped-for boost to the PC market, and throughout the SEC filing, Dell officials and financial experts said the outlook was for the company to continue to struggle over the next few years.
At one point, Dell officials said projections for the company’s current fiscal year were now 15 percent below what they were in July 2012, hitting $56 billion. In addition, in a November 2012 meeting, the special committee members learned that the company’s revenue for the seven prior quarters had missed management projections and—with the exception of one quarter—financial analyst estimates.
The Boston Consulting Group during a Dec. 5 meeting with the special committee said that for Dell to protect its business, the company would need to compete more aggressively in the higher-margin enterprise solutions and services market, and that its expansion into the space had been slower than expected, despite spending billions of dollars over the past few years to buy companies to bulk up Dell’s capabilities in such areas as storage, networking, security and software.
Dell Makes Argument for Bid to Take Company Private
In a meeting the next day, Michael Dell outlined what he would do with a private company, including rapidly expanding its enterprise solutions and services capabilities through acquisitions and R&D, hiring “large numbers” of salespeople, expanding Dell’s presence in expanding markets and investing more in PCs and tablets.
“Mr. Dell stated his belief that such initiatives, if undertaken as a public company, would be poorly received by the stock market because they would reduce near-term profitability, raise operating expenses and capital expenditures, and involve significant risk,” the document states. “Mr. Dell stated his view that a going private transaction was in the best interests of the Company’s unaffiliated stockholders because they would receive a portion of the potential upside from these initiatives in the form of a premium for their shares without bearing the risk and uncertainties related to executing such initiatives.”
Roger Kay, principal analyst with Endpoint Technologies Associates, argued in an April 1 column in Forbes that the only viable option would be to let Michael Dell take the company private and remain in charge.
“What the documents make clearer is what has been clear all along,” Kay wrote. “Dell cannot grow the new enterprise solutions business fast enough to offset the decline in the PC business. If Dell accelerates this transformation, the interim numbers will look really ugly, and Wall Street is unkind to companies with ugly numbers. The type of investment needed to develop the solutions business will negatively affect profitability for years. Thus, Mr. Dell has proposed to do this makeover as a private company.”
Kay downplayed any speculation of a hostile takeover of Dell and asserted that any plan that doesn’t have Michael Dell at the helm would significantly harm the company.
“Some people believe that Mr. Dell can see something that they don’t, some hidden value, and that the company is really worth, say, $16 per share,” Kay wrote. “To those people, I’d say, okay, you try running a company that gets two-thirds of its revenue from the declining PC business. There’s no magic here, just a guy willing to roll up his sleeves, set his alarm clock every day, and put in years of hard work to make Dell a valuable property again.”