The Exchange

Dell Shareholders Get Put Out of Their Misery

The Exchange

The rumored buyout deal for Dell (DELL) has been confirmed at last, and the Texas-based computer maker will be taken private by founder Michael Dell and Silver Lake Partners for $24.4 billion.

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Dell founder Michael Dell: Credit Reuters
He and the investment firm will pay $13.65 for each share of Dell, a price that's probably what the company is in fact worth. That said, it's also one that's undoubtedly a disappointment to many investors, especially those who have held the stock for years and were hoping for a premium if this day should arrive.

When a published report last week said Dell might be sold for $15 to $16 a share, that indicated a more palatable end was possible, yet ultimately the initial speculation about a $13 to $14 range prevailed.

Yahoo Finance produced a model in January that pegged the implied value of Dell at $13.60, but the estimate didn't account for any additional reward that might be offered to share owners in order to secure their approval to sell. It doesn't appear any will be coming.

[Dell projections: See our full discounted cash flow model on Dell.]

Then and now

For CEO Michael Dell, the man who started the company while a University of Texas college student, this marks the end -- for now at any rate -- of his creation's run on the public market. For a time, it was as brilliant as they come. Dell surged in the late 1990s with its build-your-own personal computer model, and thanks to the dot-com boom when everything technology benefited from the Internet craze, its shares peaked at $58.13 in March 2000. That was the same month the Nasdaq reached its all-time high.

After sinking under $20 through the tech-sector collapse, the stock did climb back above $40 in 2005. However, that would be the last time it would look capable of threatening its best-ever level. Two years later, a multiyear restatement would raise a number of significant questions about Dell's business and financials. Since then, what is perhaps the darkest moment in Dell's history, the shares have lost roughly 50%. Recently, they were at $13.40, up 13 cents for the session.

Still, outside of that accounting debacle, Dell didn't make a significant number of terrible mistakes during its public history. Overt problems can be easier to diagnose and treat, and at Dell, instead it's been more of middling player in a number of arenas -- very respectable at times over the years, but not in possession of a must-have product that would label it a clear favorite in the crowded fields in which it fights. Now here we are.

In PCs, it was once the leader. These days it's staring up at the likes of Hewlett-Packard (HPQ) and Lenovo, and as a percentage of revenue, desktop personal computers have steadily declined. In servers, it has to deal with H-P and IBM (IBM), among others. Dell is also in tablets, but there it must contend with Apple (AAPL), Google (GOOG) and Amazon (AMZN). Dell can hang around with these powerful names and be part of the conversation. What it can't do is claim to be No. 1.

Operationally, Dell probably will be better off without having to answer to shareholders large and small, without having to worry about every basis point and without having to struggle over every cent of cost savings. It's still a huge company, and even with the fairly conservative estimates of our in-house model, it's difficult to see revenue dropping below $50 billion annually any time soon.

It doesn't need to reinvent itself. Dell does what it does. What it can do next is spend time trying to expand its information technology services business, its most likely growth driver the next few years. Services led to the acquisition three years back of Perot Systems. Dell has to decide where it wants to dedicate its time and energy to better serve existing customers and convince new ones to come on board. Services and software is probably the answer, so don't be surprised if hardware revenue overall heads downward as competition continues to make life harsh in that segment.

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The details of the deal

Dell has 45 days to keep scouting for an alternative takeover, but it's hard to see one coming. Michael Dell, as of last May, owned about 15.7% of the company's stock. Based on the acquisition price, that would value his shares at $3.73 billion. After him, the biggest shareholder is Memphis-based Southeastern Asset Management, with 7.49%. T. Rowe Price, Vanguard Group and State Street Global Advisors round out the top five holders, according to FactSet. In a press release detailing the purchase Tuesday, the company put the chief's current stake at about 14%.

The takeover bid is 25% above the $10.88 closing price of Dell before news emerged about the possible deal. That's the positive perspective. The negative view is that it would need another 35% tacked on from here to match the 52-week high of $18.36. Outside of Michael Dell and certain members of the management team, other shareholders will get cash for their stock.

Along with the founder's cash and equity contribution and the funds from Silver Lake, Microsoft (MSFT) will loan the buyers $2 billion. Bank of America Merrill Lynch, Barclays, Credit Suisse and RBC Capital Markets are arranging debt financing. Michael Dell, who took a break as chief executive in the mid-2000s before getting back to the head office in 2007, will remain chairman and CEO, and the company will keep its headquarters in Round Rock, near Austin.

The Microsoft angle initially surfaced about a week after the first speculation of an acquisition began. Microsoft has the cash to do essentially whatever it wants, but its role in the deal came as something of a surprise. If nothing else though, it could be argued that the move shows a long-time partner that Microsoft wants it to stay in the game -- that is, give it another place to continue parking Windows. From a strategic standpoint, it may well help keep Linux, the Windows software alternative, from making further headway into Dell's machines, whether the desktop or the server.

According to the announcement, Michael Dell first brought the go-private idea to the board last August, at which time a committee of independent directors was formed to explore the proposal. Dell's board, acting on the recommendation of that committee, unanimously approved the agreement. Michael Dell stayed out of the board talks and vote.

"I believe this transaction will open an exciting new chapter for Dell, our customers and team members," he said in a prepared statement. "We can deliver immediate value to stockholders, while we continue the execution of our long-term strategy and focus on delivering best-in-class solutions to our customers as a private enterprise. Dell has made solid progress executing this strategy over the past four years, but we recognize that it will still take more time, investment and patience, and I believe our efforts will be better supported by partnering with Silver Lake in our shared vision."

Egon Durban of Silver Lake called Dell "a true visionary and one of the preeminent leaders of the global technology industry." There's no doubt that's true. In consumer tech, he has been one of the giants of our time. And for a few years, shareholders got to take part in that leadership and vision. Now we'll all see if he can get the company to the top with customers, without the endless scrutiny from investors who celebrated the most some time ago.

Assuming holders and regulators sign off, in just a few months the stock will be a thing of the past. Shareholders will have their memories of what used to be. That and a fairly unsatisfying $13.65 to invest elsewhere.

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