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Blackstone Drops Dell Bid, Cites Declining PC Market
An anonymous reader writes "The Blackstone Group has notified Dell's board that it has ended its bid for the company after performing 'due diligence' on Dell's books. The private equity firm gave two reasons for its withdrawal in a letter to the special committee of the board reviewing privatization offers: the 'unprecedented 14 percent market decline in PC volume in the first quarter of 2013' and 'the rapidly eroding financial profile of Dell.' IBM's recently announced intention of withdrawing from the x86 server market may have also spooked investors. Blackstone was one of two outside bidders that emerged after founder Michael Dell and Silver Lake Partners announced a deal to take the company private for $24.4 billion. The remaining bidders did not comment on Blackstone's withdrawal; however, the Bloomberg piece notes that Dell's original deal with Silver Lake Partners contains language preventing the latter from backing out."
I'm a doctor, not an investor.
"No matter where you go, there you are." -- Buckaroo Banzai
The Blackstone Group has notified Dell's board that it has ended its bid for the company after performing 'due diligence' on Dell's books.
They didn't like what they saw. Dell ran that company very lean and I bet that Blackstone couldn't figure out how to get the returns they want from any investment in that company. And since PC sales growth has stagnated, they couldn't count on expanding revenues and cash flows to support an obscene amount of leverage (ie debt) that these types of firms like to burden takeovers with.
Well Icahn's still in the game, he's claims to offer $15 a share vs Dell's $13.65 per share, I don't like Icahn. He tried to scam Yahoo shareholders (inc me) by claiming a deal was worth more than it actually was.
In the deal, he stripped Yahoo of all it's cash, handing it to shareholders, counted that money (the money we already owned) as money given by the Microsoft deal. He then added a loan from Microsoft which required Yahoo to pay it back with interest back to Microsoft. He counted that loan as income from the deal too. If a company CEO had done it, the SEC would be on him for fraud, but Icahn is a third party asset stripper and he's not obligated to be truthful about the value of a deal.
"Icahn's offer, which was also submitted the day before the deadline expired, includes purchasing $2bn of the firm's shares at $15 per share, and offering $2bn of cash equity financing."
So basically, Icahn is trying to buy only a portion of the shares (company is worth 22 billion), enough to scupper a full buyout. And there's the loan with interest.
He tends to list those as income to pretend an inflated figure on a buyout value. Loans are loans, you pay them back with interest, they're not income, they're not part of a buy price. If the company doesn't need the cash, they're a charge on the company. If the loan on Dell is to pay Icahns buyout, that's a leveraged buyout and its not worth squat to existing shareholders.
Dell shareholders, we Yahoo shareholders had bitter experience of that turd Icahn, you read his numbers very very closely, he tends to flat out lie in the summary about the true value of a deal. He didn't get rich by giving you his money. Classic games to watch out for: buying blocking positions to prevent a buyout, leverage buyout, buying a company by borrowing money against the assets of the company. Third party deals, e.g. agreeing with a competitor some gain if he poisons a company during buyout.
If you don't understand what I mean, look at the Yahoo deal. That would have stripped Yahoo of cash, made it dependant on Microsoft for short term money and made their income also dependant on Microsoft. MS for its part promised to buy a portion of shares in the future at a higher price. The likely block of shares that referred to was Icahns block, I believe that was to be his reward for poisoning Yahoo.
BEWARE!
They once had an appealing brand, which gave them an advantage over all the other people who were selling an indistinguishable product.
The reason Dell became big was because of really good just-in-time manufacturing control.
The biggest selling point for computers back when Dell became big was the CPU and its clock speed. It was also the fastest-depreciating component of the computer. In order to get good prices you needed to buy them in bulk, but if you stockpiled them and then took six months to sell them you'd be wiped out by the depreciation (you pay $1000 for a CPU that is worth $300 in six months).
Dell did build-to-order, mail-order, and just-in-time extremely well.
Build-to-order means that you don't end up with 47 models where you end up with 10 that don't sell well and have to be sold at firesale prices. It means that each customer gets exactly the computer they want, at the lowest price possible for that computer (well, assuming they want to buy a copy of Windows and MS Works). Their very-friendly website meant that people didn't have to walk down rows of PCs at the local retailer and try to compare the 47 different models their competitors were selling.
Mail-order means that they had little warehousing/distribution, which means less PCs stuck depreciating in the pipeline between consumers and the manufacturing plant. If they didn't sell as many model 3 video cards they just didn't order that many - they didn't have 30,000 PCs with those cards sitting in stores all over the country depreciating.
Just-in-time means that the part comes in from Intel/etc the day before it gets mailed out as part of a PC, or close to it. Again, inventory is rapidly depreciating, so you don't want to sit on anything. They were able to react to changes in the market - they didn't have a stake in one model or another selling better - they could just go where the customers were. If they offered a particular model and nobody bought it they didn't lose much, because they didn't build it until somebody ordered it.
Things like this are what made Dell big. Everybody else figured out what they were doing, and the MHz war wound down making the CPU less critical and slowing down depreciation.
Note - I'm not particularly close to the PC hardware market, so if there were other factors I'm all ears.