Well, the Dell deal is finally official.With the help of private-equity firm Silver Lake and a boatload of new debt, Dell has announced a deal to take itself private for $24 billion.
Dell’s public shareholders will get $13.65 a share, which is a considerable premium over the $10 that the stock was trading for last summer.
But it’s a disappointment for long-term Dell shareholders who have seen their investment go nowhere but down over the past 13 years.
And, at some level, it’s also probably galling for those shareholders — knowing that Michael Dell and Silver Lake would never do this deal if they didn’t think they could coin money by doing it.
Which they undoubtedly will.
To be clear and fair: Dell is explicitly allowing other potential buyers to make alternative bids in case someone wants to cut a better deal for Dell shareholders. And that’s a smart and fair thing to do.
But whether or not someone else offers to pay a dollar or two more a share to Dell’s current shareholders, Michael Dell and Silver Lake obviously think they can wring a lot more value out of the company than that.
And, as a result, this deal is yet another indictment of the way our public markets work.
Why should Dell have to go private to allow Michael Dell to do the things necessary to create a lot more value for shareholders? Why can’t Michael Dell just do these things now, for Dell’s public shareholders?
The answer, presumably, is that Michael Dell doesn’t feel like he can do these things under the scrutiny of the public markets.
Given that Dell going private is pretty much a fait accompli at this point, we might as well speculate about what Michael Dell and his private-equity partners will do when the deal closes:
- Take the $15 billion of cash on Dell’s books and use it to pay themselves a massive dividend. This technique instantly returns cash to the private-equity firm, thus leaving them with less cash at risk. This dividend will likely cover more than the amount of cash they put up to buy the company, thus leaving them playing with house money.
- Use some of the rest of the $15 billion to pay down some of the debt they used to buy the company. (They don’t want to completely overload Dell with debt, or they won’t be able to sell it at a huge premium later.)
- Fire thousands of employees and drastically cut costs.
- Sell off some crappy or un-strategic businesses.
- Maybe buy or otherwise enter the smartphone and tablet businesses.
- Sell the company back to the public-market shareholders at a much higher price than they bought it for.
- Smile all the way to the bank.
That’s standard private-equity operating procedure.
When these techniques are done well, they actually improve companies, in addition to coining money for private-equity investors.
When they’re done badly, of course, they gut companies and overload them with debt, so that they collapse within a year or two of being sold back to the public markets.
There’s nothing wrong with the good part of that.
But if that’s what Michael Dell and his private-equity backers plan to do with Dell when they buy it — if that’s the way to generate an awesome return for shareholders — it’s too bad that they couldn’t just do it now, for Dell’s current shareholders.
Now, to be clear, Michael Dell is not selling his stock, so he is assuming a lot of risk here. If he wanted to cash out, he could do that now, and just leave Silver Lake to take all the risk and get all the upside. But given that Dell has $15 billion in cash, the conclusion of both parties is probably that the risk isn’t all that great.
SEE ALSO: Dell Going Private For $13.65 A Share
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