Behind The Scenes Of Dell's Decision To Go Private

Breaking Down Silver Lake's Offer

Dell recently released a proxy statement with the Securities and Exchange Commission that detailed its discussions with Silver Lake Partners and other companies regarding its possible leveraged buyout. Here's a breakdown of the timeline of what happened along the way.

Southeastern Asset Made The First Call

According to the SEC document, the genesis of a go-private transaction started June 15, 2012, when a representative of Southeastern Asset Management, which owned approximately 146.5 million shares at the time, contacted Michael Dell with the idea, saying it would roll over a portion of its shares to the company.

On Nov. 30, 2012, Dell told the board's lead independent director Alex Mandl that he had not spoken with Southeastern about the possibility of such a transaction since the summer.

Southeastern Asset Management ended up being a vocal opponent of the deal with Silver Lake Partners.

Board Likes The Idea

Dell's board of directors heard from Michael Dell in August 2012 and noted three companies had expressed interest in a deal: Silver Lake Partners, Southeastern Asset Management and a company known as "Sponsor A."

J.P. Morgan, hired by the company as a financial consultant, told Dell's board that there was a "low probability of strategic buyer interest" in acquiring Dell because of the company's "large market capitalization, ... significant exposure to the PC market, the recent decline in the company's operating performance, and the absence of any stated third-party interest in acquiring the company over the prior two-year period."

Keeping It Close

Dell's board initially decided to refrain from contacting other potential buyers other than Silver Lake and "Sponsor A" in order to minimize the risk of premature disclosure, and because of the "preliminary nature of Mr. Dell's expression of interest," according to the proxy.


The PC Problem?

In September, 2012, Dell CFO Brian Gladden (pictured) and other executives (but not Michael Dell) told the board the company was projecting decreased revenue relating to the introduction of the Windows 8 operating system and an unexpected slowdown in Windows 7 upgrades. In addition, Gladden projected growth for tablets, "which are sold by the company in limited quantities, and the growth of smartphones, which the company does not manufacture, as alternatives to the company's core inventory of desktop and laptop PCs."

In November, 2012, after Dell reported its third-quarter financials, J.P. Morgan provided the special committee with charts showing that the company's revenue for each of its prior seven fiscal quarters had been below both management's budget and, with the exception of one quarter, consensus analyst estimates, while earnings per share performance had been mixed as compared to management's budget and consensus analyst estimates. The report also highlighted the continued impact on Dell's earnings of a weakening end-user-computing market.

What To Do?

On Oct. 10, 2012, Goldman Sachs reviewed various strategic alternatives available to Dell with the special committee, including a leveraged buyout, a separation of the company's end-user computing ("EUC", which include PCs, mobility and third-party software) and its enterprise solutions and services ("ESS") businesses, a sale of Dell Financial Services, a spin-merger transaction involving the end-user computing business and a strategic company, and a return of capital strategy by means of a share repurchase or cash dividend funded with new debt and/or existing cash.

'Sponsor A' Bows Out

On Dec. 3, 2012, the company known as "Sponsor A" notified Michael Dell that it would not offer an updated proposal and was effectively withdrawing its name from buying Dell, a decision "driven largely by the fact that its investment committee was not able to get comfortable with the risks to [Dell] associated with the uncertain PC market, and the concerns of industry analysts regarding the competitive pressures the company faced," according to the Proxy.

Silver Lake's Proposal

Silver Lake submitted a bid of $12.70 per share on Dec. 4, 2012. Two days later, J.P. Morgan told the Special Committee that a "Sponsor B" might make a credible proposal and that it was "less likely" that any other company would submit a proposal if invited to enter the process, according to the proxy.

"J.P. Morgan also reiterated its previous advice as to the low probability of credible strategic buyer interest in acquiring [Dell] as a result of the company's large market capitalization, significant exposure to the PC market, deteriorating operating income performance over the prior two-year period, and the absence of any stated third-party interest in acquiring the company over the prior two-year period," according to the Proxy.

On Dec. 10, Silver Lake was told its offer was too low and the board would consider a transaction "only at a materially higher price."

Outside Analysis

On Dec. 5, 2012, The Boston Consulting Group, a management consultant hired to assist the special committee, presented the committee with a scathing analysis of Dell's end-user computing business.

It concluded that "as a result of a likely persistent decline in the premium segment of the EUC business, unless the company changed its strategy to become more competitive in the lower-margin segment of the EUC business, the company would require years of aggressive restructuring in order to maintain its value, and would face the risk that its decreasing scale would render it less competitive."

The Boston Consulting Group expressed that Dell would need to transform from a build-to-order model to a more efficient build-to-stock model to compete more aggressively in higher-growth markets.

Enterprise Challenges

The Boston Consulting Group also observed that Dell's ESS business had been slower than expected and revenue growth had been mixed.

It further noted that "the company was still in the process of integrating its numerous recent acquisitions and that these acquisitions had yielded lower returns to date relative to the returns expected by the company's management," according to the proxy.

BCG advised Dell to take steps to drive growth in its ESS business, including increasing investment in research and development and expanding the company's sales force, according to the proxy.

Michael Dell State His Case

On Dec. 6, 2012, Michael Dell told the board that a go-private transaction was the best course for the company and stockholders. He further said that as a private company, Dell could look to extend the company's enterprise capabilities through significant investments in research and development and additional acquisitions, hire additional sales personnel, expand into emerging markets and invest in the PC and tablet business.

"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 company wrote in the proxy.

'Sponsor B' Enters, Exits The Picture

Another organization, known as 'Sponsor B,' said in mid-December it planned to submit a bid, but then withdrew from the process on Dec. 23, citing risks around the PC business and declines in Dell's operating performance, according to the proxy.

Rumors Surface

On Jan. 14, 2013, reports started to surface that Dell was in talks to go private and Dell's shares increased 13 percent to $12.29.

Silver Lake Ups The Ante

Silver Lake submitted a revised proposal for $12.90 per share on Jan. 16, 2013, that included $2 billion in financing from Microsoft.

On Jan. 19, the special committee told Michael Dell it was willing to support a price of $13.75 per share. Silver Lake countered later that day with an offer of $13.25 per share. The next day, Silver Lake upped its offer to $13.50. After several back-and-forth communications, Silver Lake increased its offer to $13.65 per day on Feb. 4 and announced the deal the next day.

Click here for Part II.