Michael Dell's rationale behind going private

In a presentation for shareholders, the Dell founder documents why he believes going private is the only way forward.
Written by Charlie Osborne, Contributing Writer
Credit: Hartmann Studios

Michael Dell's ongoing battle to try and turn his company private has been met with continual opposition since the release of the original proposal.

Announced in February, $24.4 billion — or $13.65 per share — was placed on the table by Michael Dell and investment firm Silver Lake. The deal would not only allow the company founder to instigate rounds of restructuring and job cuts without having to answer to investing parties, but Wall Street's eyes would become blind to Dell's financial status.

However, a number of shareholders opposed the deal from the beginning. Carl Icahn and Southeastern, two of the firm's largest investors, have been vocal in their displeasure since the start; investor Catherine Christner went so far as to file a suit with Delaware Chancery Court which claimed the deal has shortchanged investors. Within the complaint, Christner says that the PC maker's board of directors is responsible for selling "Dell on the cheap."

Recently, investor Carl Icahn proposed an alternative deal, which requests that the board offer $14 per share or otherwise give investing parties a $12 special dividend and the option to hold Dell stock.

Private equity firm Blackstone launched an attempt to prevent Dell going private by offering shareholders $14.25 a share, but later dropped out of the running.

Despite these problems, the company founder is still determined to press ahead. In a SEC filing, a presentation to shareholders documents the reasons why Dell should be removed from public markets. Titled "The rationale for a private Dell," the document says that "Dells' transformation is necessary to navigate a rapidly changing landscape."

The company founder argues that the PC market is changing "faster than anticipated" due to the emergence of cloud computing and mobile technology. As a result, the PC maker needs to shift from being personal computer-focused to a company based around Enterprise Solutions and Services (ESS)-focused products in order to guarantee future success and survival.

While Dell's ESS business is growing, the company's market share in software and services remains at less than one percent worldwide, and the PC market is under "significant pressure" due to changing consumer demand.

The company's ESS business is growing, but "not fast enough to offset declines in the core PC business."

"There is an emerging shift away from traditional datacenters toward outsourced and cloud-based delivery models," the presentation reads. "With respect to servers, there is significant potential for further margin erosion due to intensifying competition in x86 servers, and a competitive threat from the rapid shift to cloud computing. The company has lost share in storage since ending its re-seller relationship with EMC."

Michael Dell argues that transforming the company is "more challenging" as a publicly-trading entity. Dell argues that significant changes are needed to extend end-to-end IT solutions capabilities, expand sales coverage and compete in emerging markets to restore the company's balance books, but in the short term lower gross margins are expected, which results in lower earnings. Therefore, establishing these changes will likely affect Dell's stock price, which is likely to affect both customer confidence and employee job security.

The company founder admits that the "necessary" steps to save Dell entail "significant risks," and that the "speed of transformation is critical." However, if Dell is owned by two equity investors, these risks would be placed at the investors' feet, who would be able to "provide additional capital if needed."

Michael Dell says that a leveraged recapitalization is not a good solution as adding substantial debt to Dell while it remains public would "decrease the company's financial flexibility and hurt the company's ability to weather an economic or business downturn." It may also be the case that piling on debt could reduce customer confidence or result in job cuts.

In addition, the presentation states that "$13.65 per share is the result of a transparent, robust and competitive process." Within the filing, Michael Dell comments:

"From the outset of the process last August, I made clear that I was ready to participate with whatever sponsor was willing to pay the highest price. I encouraged each of the private equity sponsors who showed interest in the company to submit as strong a bid as they could and to assume that I would be willing to participate at the best price they were willing to pay.

Silver Lake made the only binding offer, with a fully committed financing package. Every other party that has looked at the Company has been unable to reach or exceed a price of $13.65 per share."

Although many shareholders may not be convinced by the presentation, reports suggest that a large investment bank supports the move to take Dell private.

Editorial standards