Will Dell’s Buyout Offer Ever Be Finalized?

Shareholder anger over Silver Lake’s low offer for Dell (NASDAQ:DELL) has not entirely dissipated, but sources familiar with the matter told The Wall Street Journal on Monday that the company was close to finalizing a $23 billion deal to take itself private at a price between $13.50 and $13.75 per share.

The fact that the computer company’s founder and chief executive Michael Dell has decided to go private is an important moment in the struggling personal computer industry, as the company’s buyout “marks an unofficial end to the era when a handful of young entrepreneurs made PCs the dominant computing device,” stated the publication. But the buyout will be the largest transaction of its kind since the financial crisis, if it ever materializes.

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Private-equity firm Silver Lake Partners will invest more than 1 billion, Dell’s chief executive will add his 16 percent stake in the company, valued at $3.7 billion, the investment firm he controls will contribute $700 million, and Microsoft (NASDAQ:MSFT) will invest approximately $2 billion in the form of a subordinated deventure, which is a less-risky investment than common stock. Microsoft is not expected to get a seat on the company’s board, but the two companies will likely tighten their commercial relationship. A source told WSJ that Dell and Microsoft will come to an agreement over the use of the Windows operating system.

In addition, four banks will finance approximately $15 billion in debt to help fund the deal…
The $13.50 per share offer represents a 23 percent premium to the $11 a share price that Dell traded at before the deal was reported in early January. But it is far less than the $18 per share the company was trading at last year, and this has prompted shareholders to call Silver Lake’s proposal too low. As Barron’s reported, the deal could be meet with shareholder opposition and potentially lawsuits if the price is not increased. Even a $14-per-share leveraged buyout would “amount to insiders trying to steal the company,” a shareholder told the publication several weeks ago.

Barron’s columnist Andrew Bary noted, “It is unprecedented for a large company to go private at such a paltry P/E, and Dell’s board might have a hard time backing such a sale.” Dell may be struggling in the personal computer business, but it is still a profitable company with net earnings of approximately $3 billion predicted for both the current and next fiscal years.

However, with demand for personal computers shrinking, Dell and its investors face a tough obstacle in their attempt to turnaround the company. Because of the negative trends in the industry, sources familiar with the deal said that investors will likely support the buyout eventually.

Bristlecone Value Partners portfolio manager David Fleer does not agree. He told the Journal on Friday that he would be disappointed if the deal valued the computer company at a price between $13 and $15 per share. “I think it undervalues the company,” he said, adding that he would vote against the deal.

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