Two Outside Bids For Dell Threaten Founder's Buyout Plan

An anonymous reader writes "Seven weeks ago, Dell announced a definitive agreement to be taken private by a group led by founder and CEO Michael Dell and the private equity firm Silver Lake Partners, assisted by a $2 billion loan from Microsoft and debt financing from a group of big banks. The deal was valued at $24.4 billion ($13.65 per share of Dell common stock), but allowed for a 45-day "go shop" period for alternative bids to be submitted to a special committee of Dell's board. Not all large shareholders were happy with the price, and early this month billionaire investor Carl Icahn threatened to tie up the buyout in court unless a large special dividend was paid to shareholders — without showing interest in buying the company himself. More recently, the private equity firm Blackstone Group jumped into the fray, and by Friday night's deadline both Blackstone and Icahn had submitted bids for Dell exceeding the original $13.65 per share agreement. Blackstone is said to be interested in installing Oracle's Mark Hurd as CEO, replacing Michael Dell. As Hurd was fired as Hewlett Packard's CEO in 2010 for alleged sexual misconduct involving an outside consultant named Jodie Fisher, he might have difficulty landing another CEO job at a publicly traded company; the Dell position could be an intriguing fit for both sides."

Comments

My fellow slashdot-ers

[vswee]

Lets pool our loose change together and buy dell for ourselves! Anyone interested?

Re:My fellow slashdot-ers

[Anonymous Coward]

Not Interested.

Not sure why anyone's interested actually. Can someone explain why I'd want to own a commodity PC maker?

Competition is fierce, margins are thin, almost nonexistent.

It's like the Unix workstation market in the early 90s all over again. Someone like Lenovo or HP could buy them to eliminate them from the playing field. But why buy them – just wait and they'll probably eventually fail on their own.

Or tell me how I can build a product with a decent margin that people will line up to buy. Like – love them or hate them – Apple.

Re:My fellow slashdot-ers

[Anonymous Coward]

This post represents the largest and probably most common misconception of Dell. While it is still a commodity PC maker, the lion's share of its business is not in that space. The buying spree it's used over the last 7 years has transformed it. Unfortunately, most people only think of it in terms of the PC business.

Until it can change this image, it may be difficult to change the share price. Hence, going private could allow it to more easily transition the business and its public face.

Re:My fellow slashdot-ers

[PolygamousRanchKid]

Lets pool our loose change together and buy dell for ourselves! Anyone interested?

That won't work. They won't accept Slashdot-ers' Bitcoins . . .

Re:My fellow slashdot-ers

[dreamchaser]

Not to mention the vast number of companies that buy Dell PC's and servers still, year after year. Margins are low, yes, but the repeat business and volumes involved are nothing to sneeze at.

Re:My fellow slashdot-ers

[ColdWetDog]

Loose change, not loose screws.

Re:My fellow slashdot-ers

[Drakonblayde]

You're forgetting their purchases of Compellent and Force10. Dell figured out awhile ago that there's no real future in commodity PC making, and decided to focus on providing services, as well as a complete end to end data center solution. Where Dell makes their money now is by selling you Dell servers, Dell network gear, Dell storage, and the service contracts that go along with supporting all of that.

Not just sexual misconduct - covering it up

[jasenj1]

"Hurd was fired as Hewlett Packard's CEO in 2010 for alleged sexual misconduct involving an outside consultant named Jodie Fisher."

As I recall, Hurd was not fired only for the sexual misconduct, but the falsifying of expense reports and other misuse of corporate money to cover up the affair. Sleep with whoever you want, but when you steal company money, you're gone.

http://www.huffingtonpost.com/2010/08/06/hp-ceo-mark-hurd-resigns-_n_673858.html

Re:Not just sexual misconduct - covering it up

[garyebickford]

True that. A fellow founder of a startup I was involved in got caught doing some shenanigans after we went public. It cost him big. If we were still private it would not have been such a big deal, but once you are public the rules change.

Longer version - he was the head of sales, and had been padding his expense reports for a long time but we put up with that. He also found ways to take 'short cuts' to vacation spots on the way to legitimate business events. But then he went to our our new East Coast distributor for a week to do training and such, to be paid for by the distributor. So he filed his expense report and we sent it on to the distributor for reimbursement. His expense report included a lot of expenses that the distributor's accountant thought were a little 'shaky', but then the head of distributor company pointed out that he had expensed $60 for 'lunch with the distributor' - on Memorial Day, which he spent on the distributor head's boat! So he was caught in an out-and-out fraud. When you are an officer in a public company you can not do that. (You shouldn't for any company, but in a public company it's possibly felonious.)

He was gone the next day, and he was forced to sell back his shares in the company for the original purchase price. Last I heard some years later, he was working in a 7-11 store. IIRC we also lost the distributor.

Re:Not just sexual misconduct - covering it up

[symbolset]

Hurd was CEO of HP from 2005 to 2010. In that time despite weathering a global meltdown shares of the company increased in value from $20 to $46. In the time since it has not done as well, though it seems to be rebounding right now.

Too Bad

[indytx]

I was actually fairly optimistic about Dell taking his company private in hopes that he could get away from the quarterly "How much did you make these last three months?" As I understood things, Michael Dell felt that Wall Street had crushed the life out of his company or its ability to innovate. Dell offered pretty good business products and services fifteen years ago (next-day warranty on-site repairs to BFE, Texas). Now it's just a target because of its cash on hand and the value of its financing business. Sigh. Of course, in the grand scheme of things, it's been so long since Dell made quality business computers, I find it hard to believe that quality would once again become important without firing everyone in management, and that almost never happens. Still, it would have been nice.

Re:Too Bad

[bsane]

Meh- he should just liquidate the company and give the money to the shareholders...

Re:Too Bad

[lucm]

Dell has been in transition for a while. They are moving toward professional services, software and stuff like data center hardware and automation; they did a lot of acquisitions in that spirit recently, such as Quest software, Equallogic and Compellent (enterprise storage), etc. Michael Dell has explained many times that they kept selling PCs so they get volume pricing on parts they use in servers too, not as a business focus.

IBM did the same kind of transition a long time ago (hence Lenovo). Apple also changed its business a while ago and sells now more iPhones than MacBooks. That is part of evolving. Yet whenever "experts" talk about Dell they only focus on their PC business, and their solid financials are not reflected in the share price as everybody these days is obsessed with growth and nothing else.

So in my opinion this whole thing has 3 possible outcomes:
1) Dell goes private, with Silver Lake or other private equity firm
2) Dell goes private and some parts of the business are sold, like the financial services to Blackstone and the PC to Lenovo/HP
3) The whole thing falls apart because some greedy shareholders (including new ones like Icahn) are making it too difficult/expensive

Dell has a very interesting culture, they have perfected the concept of mass customization, and for years with they financing services they have made it easy for small business to get good computers and servers at a bargain price. I wish them all the best.

Re:Too Bad

[Virtucon]

Well interestingly enough, if somebody is upping the ante so to speak on a buyout, that means that they see value in the company. Nobody is going to invest Billions in a company only to see it dismantled or lose significant value, that is unless your HP (in terms of their Autonomy and EDS deals). The idea of Hurd being involved is disquieting and they may as well dredge up Carly Fiorina if they really want to put the nails in the coffin for Dell. Unfortunately for Dell, the landscape is changing. PC sales are on the decline and after owning two Alienware systems, I can say with certainty that that business is dead for them as well. Sure there's value now but without a solid business strategy Dell will not be able to compete with innovation on the hardware side. On the Plus side their business consultancy services are making them money but that also is a well played strategy that has worked for IBM but if you look at that it's mostly outsourced "or rightshored" resources to maximize the profit margins.

The Dell shareholders at least with these two other offers have some hope as well that they'll get a bit more out of the deal. In going private there's always the problems associated with shareholder equity and you can bet those with large stakes in Dell will want as much as they can get.

Re:Too Bad

[squiggleslash]

That's probably Icahn's plan.

The man was, IIRC, the inspiration for Wall Street's Gordon Gekko.

Re:Too Bad

[hb253]

If a private equity firm ends up buying Dell, you can be sure they will structure the deal such that they suck it dry and leave it bankrupt and eventually out of business.

Re:Too Bad

[Telvin_3d]

Nobody is going to invest Billions in a company only to see it dismantled

That's exactly what they do. Buy it up, run up a massive debt which is used to pay out the equity firm and shareholders and then leave the smoking corpse massively in the hole while they walk away with the profits. And once it's a private company again the books are no longer public so its easy to hide the financial situation until they have finished sucking it dry.

Re:Too Bad

[Rick Zeman]

Isn't the definition of a PE buyout a mugging where the victim beats himself up?

Re:Too Bad

[mabhatter654]

That's why it only works if Michael Dell is the one at the top. At least he has a big stake in the company because his name is on the door... He won't want to chop it up and part it out so quickly.

The other player are just pumping their stocks so they can bail when it goes private... They won't have nearly as much power to corner the stocks as they have now.

Re:Too Bad

[citizenr]

That's probably Icahn's plan.

A girl can dream.

Re:Too Bad

[sunspot42]

Of course the banks would - they're really loaning the money to the buyout firm, not the company being bought out. The firm performing the buyout makes big money, as do the banks. The firm being bought out is stripped to the bone and charged with servicing that debt. Sometimes they survive and can be spun off into the market again for big profits. Sometimes they limp along in private ownership and make modest profits, all of which go to the buyout firm instead of being shared with public stock owners (or, god forbid, the remaining employees doing the actual work). And often they just implode. The banks take a hit on some of these deals knowing that often they turn out to be quite profitable, at least in the short term - profitable enough for them to be able to afford to write off quite a bit of bad debt.

They're sort of like corporate identity theft rings. A buyout firm is essentially using the good credit of a going business concern to take out enormous loans it couldn't get on its own. They use some of the money for buying the going concern, and then hopefully refinance that debt at lower interest rates down the road, pocketing the difference and using it as collateral for the next buyout. If the debt load implodes the legitimate business they purchased, well, that's just too bad for the American economy. The parasites are off to suck the next victim dry via identity theft. But it often works long enough for them to cash out and use the money to hijack another business.

Remember, the guys running these sham operations are paying themselves enormous salaries and bonuses, regardless of how well the identity theft operation pays out. Even if Dell implodes they still make millions in the process. The success or failure of the companies they took over only alters the magnitude of the payout, not its eventuality.

Where things get interesting is if interest rates start rising again. We've been in a long term cycle of declining interest rates essentially since the early 1980s. That's been facilitating these buyouts for decades now. These gamblers are betting that if they borrow billions today at, say, 6%, they can refinance in the future at 5% and pocket the difference, covering up for a lot of incompetence in the running of the actual businesses they've hijacked. If that changes, expect to see a slew of business that were involved in these sketchy transactions go under - the buyout firms will cut their losses and run, leaving a bunch of investors holding the bag.

Don't worry about the banks, though. If things get too bad they'll just call up Congress and request another bailout, using your retirement money.

Poison bids

[Anonymous Coward]

Neither Icahn, nor Blackstone were interested before Dell made the offer.

Icahn is a very divisive man, if you recall the Microsoft bid for Yahoo, he came in pretending to be an activist investor. Actually he didn't use his own money, he took European style put options on Yahoo. He then negotiated a package with Microsoft which he pretended was worth about $20/share, but actually included loans and was worth only about $8/share.

http://seekingalpha.com/article/80626-carl-icahn-yahoo-raider

One of the terms was that Microsoft would buy a portion of Yahoo stock at an inflated price in future (unspoken but obvious was that this would be Ichans stock, in effect it was his fee for destroying Yahoo).

He's turd, a lying corporate raider that's made billions by from shareholders using raider strategies. So as soon as I see his name attached to this, I immediately think he's taken out options on the stock and wants to drive the price up with a fake bid.

Re:Poison bids

[garyebickford]

AFAIK the major difference between European and US style options is that US options can be sold at any time up to the expiration, while European options can only be sold at expiration. So US options are much more flexible. Thus I don't know why Icahn would use European options.

Example: FOO (ticker for FooCo) is trading at $10. I buy an option to buy 100 shares of FOO at $10 six months from now, and I pay $.10 per option. I'm betting that FOO will be worth more than $10.10 in the next six months. For example if FOO goes to $10.50 I my option is now worth $.40 so I can make $.30 = 3 times my money. That's the basics of a 'call' option. (If the stock doesn't go up, the option expires worthless after six months, and I'm out the entire $.10 per share.)

But let's say after 3 months, while the stock is is now $10.20, there's a cloud on the horizon. I think before the six months is up the stock will be back down below $10, making my option worthless. In the US I can sell my option immediately, making only $.10 but avoiding the predicted loss of the entire $.10. In Europe I can not do that, I must hold the option until the bitter end.

Note: options give the opportunity to make a lot of money, but also the opportunity to lose 100% of your investment. Some options ('puts' - selling short) have the opportunity to make a lot of money but the opportunity to lose several, or many, times your money - you have an unlimited risk.

It's been a while since I was into this and I never was particularly good at it so I may have some details wrong but I think I have the gist.

Re:Poison bids

[femtobyte]

Presumably, the relative "lack of flexibility" of the European-style options ends up built into their market price. Thus, the price of a more restrictive option will be lower than a more flexible one (according to how much investors think the risk of inflexibility will cost). If your strategy works out right (so the stock price is high at the expiration time), you can make a lot more profit buying cheaper, inflexible options than "wasting" the higher cost of unused flexibility. The European options hence aren't "inferior," they're just a different kind of gamble which will find its own price competitive with the US-style ones.

Re:Poison bids

[garyebickford]

Yes, I think you are right.

What's the business plan?

[Bearhouse]

Hurd? Seriously? What did he do to turn around HP's operations before he got fired?
What makes these private equity guys think they can invest a ton of (borrowed) money in Dell and then somehow turn it around so dramatically that they will be able to make a profitable exit in the near future?

I can understand MS propping up Dell with a soft loan from their cash pile, to safeguard one of their biggest conduits to market. Maybe also as a potential OEM for MS hardware, (less likely). But Blackstone? Hell, it's not like Dell has a load of assets to sweat and strip either, they are pretty legendary for running a lean operation. Biggest assets must be Dell's name and a customer base that has loyalty based on price...

Re:What's the business plan?

[alen]

they don't

private equitty wants cash. they will "buy" dell, load them up with debt and special dividends and then take the cash for themselves leaving dell with lots of debt

I've found a better link to Icahns games here

[Anonymous Coward]

So Icahn claimed the deal was worth $33 a share, in fact he was including Yahoo cash in the numbers which was already owned by the shareholders, he proposed they distribute their cash to the shareholders. He then included an interest bearing loan from Microsoft as a gain to shareholders, it isn't, its money to Microsoft as interest from Yahoo for money it doesn't need to lend (well unless they hand their cash reserves to shareholders making them vulnerable to creditor Microsoft).

Then there's the final claim of value, the $19.50 a share he claim Yahoo would be worth after it had been stripped of assets, and in debt to Microsoft:
http://news.cnet.com/8301-1023_3-9990402-93.html

Microsoft had agreed to buy a portion of shares at that price in future. Almost certainly Icahns block of puts. That number is because he had put options at $19.50 which would be placed on expiry. You can see how he did a deal with Microsoft to enrich himself while trying to deceive the existing shareholders.

He lied to them about the value of the deal, it would have left Yahoo's advertising income dependent on Microsoft, whilst at the same time putting them in debt to Microsoft and stripping them of cash so they're easy to knock over.

He's bad news, if he's involved in a bid for Dell, you Dell shareholders are about to be ripped off.

If he gets his way, he'll be rich and you'll be poor. If he doesn't get his way, he agitates the company enough to drive down the price. By the time his guys had left the Yahoo board, Yahoo was practically gutted of its advertising revenue at Microsoft's gain.

Hurd -captain of titanic

[Anonymous Coward]

If you want someone to collide with an iceburg, Mark Hurd is the rare sort of individual who can set a course straight for the one most likely to sink your ship. C'mon, the guy has such a lack of ethics, combined with a lack of subtety, that he got caught using company funds to pay for his girlfriend. And the best plan for your investment is to hire this weasel.

Interesting..

[Anonymous Coward]

Dell should let either Blackstone or Icann purchased his share. Let them both have Dell Computer on their hands. Let's see whether they can control a "real" company instead of just trading it.

Ruin Dell like Java

[devforhire]

Don't let past Oracle execs run your company. Oracle has single handedly destroyed Java by their indifference/incompetence.

refreshing honesty

[Threni]

billionaire investor Carl Icahn threatened to tie up the buyout in court unless a large special dividend was paid to shareholders

Re:crocodile tears

[gatkinso]

To be fair, the label "predator" is a bit strong on this case. "Pig" is more appropriate.

Perfect Storm

[mauriceh]

This is too wonderful for words to describe:
Dell, Hurd, Icahn, Ballmer, Ellison, all in one place?
Let them have a meeting and use a mini-nuke on the place.

Are we sure that we can not get Apple interested as well?

In one small step the whole USA tech environment could be improved beyond measure.

Opportunities like this should not be ignored!
Maybe we could get the Chinese to "buy in", and have the dirty work executed by the Taliban
or perhaps North Korea?

I smell a book deal..

Re:Perfect Storm

[game kid]

This is too wonderful for words to describe:
Dell, Hurd, Icahn, Ballmer, Ellison, all in one place?
Let them have a meeting and use a mini-nuke on the place.

I like this idea, except the "mini" part. Super-size it, lest they survive and lich out on us (can you even imagine how dangerous a lichform CEO can be!? They can freeze, teleport, and make business deals!).

Re:crocodile tears

[femtobyte]

Right, because once parents stopped being allowed to get their kids likker'd up, they lost the ability to teach them that gang-raping a comatose woman is un-cool.

Wait, no, that makes no sense.

I'll believe that overly-restrictive alcohol prohibition has some culpability for specifically alcohol-related problems (like incidences of binge drinking and alcohol poisoning among young drinkers). But gang-raping a drugged woman, then tweeting it to your pals to show how cool you are, isn't something that "just happens" whenever you get drunk --- when you're drunk, you're just uninhibited in carrying out actions that you'd somewhat like to do cold sober (but realize you wouldn't get away with). This incident indicates a cold-sober culture of misogyny (revealed by "vero in vino"), which is an entirely separate problem from alcohol-prohibition-specific harms.

$2B from Microsoft

[bill_mcgonigle]

I'm surprised this opportunity hasn't given Microsoft the impetus it needs to do the "whole widget" thing, like it seems to envy in Apple. Really, with Microsoft owning Dell, many of the corporate players who buy IBM, HP, et. al. would quickly jump ship to avoid the finger-pointing the 3rd parties are capable of getting away with. Since the DoJ consent decree is expired, it would seem like the right time, but perhaps this becomes easier after the private sale is complete.

Re:crocodile tears

[femtobyte]

Yeah, "bad shit" happens, like black eyes from a drunken fistfight, or a cock-and-balls drawing in permanent marker on someone's forehead.

But "everyone in the room agrees gang-raping an unconscious woman is fun" is a bit beyond "bad shit" that any drunken teen would accidentally do without their parents around. This should be seen as no more normal/OK than a gang of drunken teens deciding to go out and knife a gay/black/jew/nerd to death just for laughs, "because boys will be boys." Rape apologists like you are missing the actual societal problems (a total disregard for, if not gleeful violation of, the personal boundaries of women's bodies), trying to assign blame on "big bad government regulations against partying" instead of pervasive misogyny.

Dell is moving toward India

[Anonymous Coward]

I used to work for Dell Services. Our entire management chain was in India. They outsourced the division president around Christmas. When I looked on line it was India all the way up the chain. My manger was in India. I talked to her 4 times total in 2 years. We would get invited to meetings in India at 2 AM. So it is obvious where they are going.

Dell brings a lot of H1-B and L-2 visa transfers over instead of hiring Americans and is pushing as much work to India as possible. The job I was in did not have alot of hours and they were not ripping me off. I can't speak for Dell corporate. Dell services was Ross Perot's company. Its basically just a big contracting company. It is more than a body shop since they don't bid on small projects. That was a Perot policy. They had layoffs at the end of the year. I don't know anyone who was here on a Visa who got laid off. If the new H1-B visa thing goes through I expect more non-Visa Dell employees will be deemed 'unqualified' and replaced.

For those wondering non-managers don't get raises. It is pay for performance, but no one does well enough to get a raise They also slashed benefits. Medical benefits now only cover generics. This means if there is a semi-like generic and your doctor says you need this other drug (noteably a cancer drug) you get NO coverage whatsoever.

A higher price for Dell going private is bad for employees. When companies get bought out it is with loans. The service on the loan is paid from profits in the company. It goes right on the books. Banks won't give loans this big unless they can use the company as equity. Which means that if they can't pay the loans, then the company gets broken up and sold in pieces to pay the banks back. This usually means wage and benefit cuts. In Dell's case it means more Americans get canned for jobs in India for Visa transfers to the US.

They do some silly stuff. They had this video on the internal site where they said everyone is a customer service rep. They wanted people to volunteer their time to provide online customer service to people on top of their regular duties. It was so pathetic a group of us were making fun of the video.

Re:Dell is moving toward India

[Xest]

FWIW I and both my previous employers all stopped using Dell when they started to move to India.

It coincided with a massive decrease in build quality and support quality - laptops turning up without keyboard cables plugged into motherboards, tech support folks in India insisting they need us to give them the error message on screen before they can get an engineer out when we phone up to tell them the laptop is completely dead and wont turn on.

Prior to the outsourcing moves we actually used to really like Dell, quality hardware and quality support. We were happy to pay for that. Now it's just bottom of the pile trash and I can get that cheaper elsewhere I'm afraid.

Here's the problem....

[erp_consultant]

As much as Dell has tried to branch out into other lines of business besides commodity PC's, Wall Street still sees them as PC makers. Sure, they do a lot of work in the Enterprise space but, try as they might, they can't shake that "PC maker" label. Dell bought Perot Systems a few years back, trying to get into the Enterprise Software business. I could probably count on one hand how many deals they have won since then. Maybe Michael Dell can turn it around but he's got a tough road ahead of him. As far as I can tell, the only PC maker that has successfully made it into the services business is IBM. My bet is that Ichan will sell the company off for parts.

Punishment enough.

[godel_56]

After being sacked for cheating on his expense account to shack up with his mistress, at the rate of $10,000 to $20,000 a time:

Hurd acknowledged there were "instances in which I did not live up to the standards and principles of trust, respect and integrity that I have espoused at HP." Hurd, who is married with two children, will get a $12.2 million severance payment and nearly 350,000 shares of HP stock worth about $16 million at Friday's closing price. The company also extended the deadline for exercising options to buy up to 775,000 HP shares."