1. 1 DELL – Inside the Nastiest Tech Buyout Ever
DELL - LBO
Inside the Nastiest Tech Buyout Ever
Sam Gardner
December 4, 2014
MGT 6066 - Corporate Restructuring

2. 2 DELL – Inside the Nastiest Tech Buyout Ever
TABLE OF CONTENTS
1.0 Executive Summary
1.1 Company Overview
1.2 Products and Services
1.3 Business Model
1.4 Motivation
2.0 Market Reaction
2.1 Carl Icahn and DELL LBO
2.2 Analyst Reviews and Recommendations
3.0 Deal Financing
3.1 Valuation
4.0 Final Verdict
4.1 Dell’s Candidature for an LBO
Appendices
Appendix-A Financial Plan
Appendix-B Research
Appendix-C Cost & Quotes
Appendix-D Technical Design
Appendix-E Technical Calculations

3. 3 DELL – Inside the Nastiest Tech Buyout Ever
1.0 EXECUTIVE SUMMARY
1.1 COMPANY OVERVIEW
Dell Inc. is an American privately owned multinational computer technology company based in
Texas, United States. It develops, sells, repairs and supports computers and related products and
services. Bearing the name of its founder, Michael Dell, the company is one of the largest technological
corporations in the world, employing more than 103,300 people worldwide.
1.2 PRODUCTS/SERVICES
Dell sells personal computers, servers, data storage devices, network switches, software,
computer peripherals, HDTVs, cameras, printers, MP3 players and also electronics built by other
manufacturers. The company is well known for its innovations in supply chain
management and electronic commerce, particularly its direct-sales model and its "build-to-order" or
"configure to order" approach to manufacturing—delivering individual PCs configured to customer
specifications. Dell was a pure hardware vendor for much of its existence, but with the acquisition in
2009 of Perot Systems, Dell entered the market for IT services. The company has since made additional
acquisitions in storage and networking systems, with the aim of expanding their portfolio from offering
customized computers only to delivering complete solutions for enterprise customers.

4. 4 DELL – Inside the Nastiest Tech Buyout Ever

5. 5 DELL – Inside the Nastiest Tech Buyout Ever
1.3 BUSINESS MODEL
The business model worked extremely well in the 1990’s and early 2000’s. DELL expanded beyond
PC sales into additional product lines. In 2004 Michael Dell felt confident enough to leave as CEO of
the company, but remain as chairman. Unfortunately the performance of the company under the new
President (not a CEO) was not as per the expectation which forced him to return as the CEO in January
2007. Changes in the business landscape, customer preferences along with the rise of smart phones,
emerged in a maturing industry and Chinese rivals added to pressures on the firm. However, the
biggest “game changer” that was about to turn the market on its head was the rise of the computer
tablet market via the introduction of the iPad. Dell failed to act, partially due to the perception of the
changes in customer preferences as a “fad” but also due to the failure of previous product launches. In
2012, DELL continued to lose market share as its share price continued to drop from an all time high
of $54 in the dotcom boom to a value under $10 in 2013.
1.4 MOTIVATIONS
Michael Dell had many reasons to want to take his company private beginning in January of 2013.

6. 6 DELL – Inside the Nastiest Tech Buyout Ever
● Financial reasons were a primary concern in taking the company private. Being the largest
single shareholder of the firm, the slide of the stock price saw significant reduction the value of
Michael Dell’s investment and he believes that the shares are undervalued.
● Dell wanted greater independence from Wall Street investors. By being private he believes he
could restructure the company without distractions of quarterly reports or activist
shareholders such as Carl Icahn and several pension funds, all while keeping his vision of the
company away from competitors. After a successful restructuring, Dell could either retain the
value of his firm or take it public again. Silver Lake (financial partners in the buyout) had
experience in just this type of restructuring.
● Taking advantage of the LBO process can help DELL (and M. Dell) avoid cash parked overseas
as mentioned in Slate Magazine. DELL’s cash stockpile and current profits ought to make it a
valuable company despite its poor growth outlook. But before those profits or cash holdings
can be paid out to shareholders as dividends, they would have to be “repatriated” to the United
States. Then a 35 percent corporate income tax would be levied, and only then would
shareholders get their money. A leverage buyout offers a workaround to avoid many of these
taxes. Shareholders make money directly as their shares are bought back at a premium. Much
of the money that would go to buy the shares would be borrowed from banks, who’ll earn a
profit of interest payments. Those interest payments can be made, in part, with the repatriated
cash. Except this time the cash would not be taxed, since interest payments on corporate debt
are a tax-deductible expense. Like magic, Dell’s shareholders would be extracting money from
the firm without giving Uncle Sam nearly as big a cut.

7. 7 DELL – Inside the Nastiest Tech Buyout Ever
2.0 MARKET REACTION
During late 2012 and early 2013 there were rumors that Dell was trying
to organize a LBO. As these rumors became more ardent, stock price
began to rise from just below $10 in late December 2012 to just over
$13.27 on 4 February 2013. Rumors were confirmed on February 5,
2014 when Dell announced his LBO plans for $13.75 per share. This rise
in market price as well as sustained stock price persisted while the DELL
board was allowed to take itself shopping for 45-days. Within days
several of its major investors - Yacktman Asset Management,
Southeastern Asset Management, Pzena Asset Management, Harris
Associates LP and Carl Icahn - opposed the deal feeling that the initial
offer price was too low.

8. 8 DELL – Inside the Nastiest Tech Buyout Ever
During the 45-days shopping period, over 65 companies were approached with no offers. The lack of
interest from outsiders motivates Icahn who owns over $1B in stock of the firm to threaten a fight by
proxy for DELL with assistance from Blackstone. Many rounds of negotiations continued until DELL
announced its quarterly earnings in August 2013. EPS was $0.12, down 71% from $0.42 from the
previous year. Revenues were a barely higher from 2012 to $14.5B. Operating income was $272M,
down 70%, while net income fell 72% to $204M.
Many opponents of the buyout begin to either drop their opposition or simply dispose of their shares,
while the market price hovered around Dell’s $13.75 offer.
2.1 CARL ICAHN AND DELL LBO
Carl Icahn’s campaign to prevent Michael Dell from taking the technology company he founded in the
1980s private felt like it might never end. Indeed, we might be on the 150th rescheduled special
meeting by now, had Dell not changed its by-laws to allow insider owners the right to vote on the
leveraged buyout. Icahn wanted his alternative proposal voted on at the same time to reduce risk for
shareholders, but the Delaware Chancery Court ruled that Dell’s voting standards were permissible.
Despite saying he would seek appraisal, Icahn sold out shortly afterwards, leaving a group of
shareholders including T. Rowe Price wondering whether the $13.75 per share deal was good value.

9. 9 DELL – Inside the Nastiest Tech Buyout Ever
2.2 ANALYST REVIEWS AND RECOMMENDATIONS
Morning Star Analysis
Overview:
1. Good to take Dell private as it’s trading near 10-year low
2. Since 2007, acquisitions in companies with high-margin revenue that complement its portfolio of
products
3. Dell’s new mobility products could improve top-line performance in the near term
4. LBO is a good deal for Microsoft – providing financing at an attractive interest rate, helping a key
business partner – Dell is a major conduit to Microsoft’s end market LBO is a good deal for Dell –
alleviates public scrutiny and helps the corporate strategize for the long term
Price Estimate
Bull: $31.00 Base: $14.00 Bear: $4.00
Company Evaluation
Strengths Weakness

10. 10 DELL – Inside the Nastiest Tech Buyout Ever
- Solid Financial Health
- Pivot from a computer hardware provider to a cloud
services provider pose a number of significant risks
for the company
a. Further price degradation in PCs from increased
competition
b. Risk in retaining the acquired company during
the process of accelerated acquisition
c. Push to set up consulting services and virtual
services at the same time could be deemed as a
conflict of interest by customers and harm its
credibility
- Competitors in cloud serves like Amazon, Google, are
established service providers and are pushing for
rapid technology innovation. If more efficient and
disruptive solutions are invented, Dell’s newly
acquired/constructed services could be rendered
obsolete.
Morgan Stanley Analysis
Overview:
1. Financial returns rather than a change in strategy drove Dell’s decision to go private.
2. Dell remains focused on shifting its revenue mix towards enterprise segments while NOT de-
emphasize PCs or sell assets.
3. High interest coverage ratios and debt/EBITDA of less than 3X, Dell is in solid financial status.
Price Estimate
Bull: $18.00 Base: $13.66 Bear: $10.00
Company Evaluation
Strengths Weakness
- Michael Dell as CEO and Chairman
reinvigorates the corporate culture and
streamlined the decision-making process.
- Direct-sale strategy “customer intimacy”
permitted streamlined production and
distribution procedures.
- High exposure to low-margin PC industry.

11. 11 DELL – Inside the Nastiest Tech Buyout Ever
Standard and Poor Analysis
Overview:
1. Gross margin narrowed slightly in FY 13
2. Revenue fell 9% in FY 13, projected to fall 3% in FY 14
3. Weakness in core personal computer business, consumer and enterprise
Price Estimate
12-month targeted price: $14.00 Fair Value Calculation: $18.10
Company Evaluation
Strengths Weakness
- While Dell remains structurally
disadvantaged with 65% revenue exposure
to PCs and servers, recent acquisitions
increases the likelihood that Dell can grow
revenue and improve margins.
- Accretive acquisitions could better
position Dell for mobile Internet
- Weakness in core revenue exposure due to
macroeconomic environment and increasing
competitive pressure
3.0 DEAL FINANCING
3.1 VALUATION

12. 12 DELL – Inside the Nastiest Tech Buyout Ever
4.0 FINAL VERDICT
4.1 DELL’S CANDIDATURE FOR AN LBO
Bottom Line Up Front. The answer is “Yes”, DELL was an excellent candidate for an LBO
As mentioned earlier in the paper, the share price of DELL had been slowly declining beginning with
the initial step down of Michael Dell as the CEO. The stock that once traded as high as $54 was now
down to a mere $10, which was considered tremendously undervalued by Dell for several reasons. It
was clear that it still had intrinsic value. Learning from the merger of HP & Compaq, that bigger isn’t

13. 13 DELL – Inside the Nastiest Tech Buyout Ever
always better. DELL had to redefine itself in a rapidly changing technological environment, diversify
revenue streams to include services and more advanced business hardware.
DELL had several things going for it at the time of the LBO. It had a strong brand name and revenues
over $14.5B. Its cash reserves were in the hundreds of millions of dollars both in the U.S. and
overseas. DELL had participated in billions of dollars worth of acquisition over the years which were
just starting to pay off. Not to mention the talent of the founder of the company, whose name was still
on the company who was passionate about the firm which bore his name, with the possibility of taking
the company public again after a successful restructure.
It has been a little over since the LBO was finalized. Early indications are that Michael Dell and his
partners made a smart business decision. Bloomberg reported on November 6, 2014:
“A year after taking Dell Inc. private in a $24.9 billion buyout Chief Executive Officer Michael Dell and
private equity firm Silver Lake Management LLC have made a paper gain of at least 90 percent on
their investment.”
Silver Lake last year invested $1.4 billion and Dell himself put in a stake worth $4.2 billion to take the
company private, with the rest of the transaction financed by debt and cash from the personal-
computer maker. Dell’s equity value currently stands at $10.8 billion or more based on valuations of
Hewlett-Packard Co. and other publicly traded rivals. That’s almost two times the $5.6 billion that
Silver Lake and the company founder invested in the leveraged buyout. The CEO now owns 75 percent
of the Texas-based company, and Silver Lake has a 25 percent stake.
Some of Dell’s customers said the company has become more responsive since going private. Jason
Cook, chief technology officer of BT Group Plc (BT/A)’s North America Global Services division, said at
Dell World this week that he no longer faces the challenge of navigating through various parts of Dell
and that the company is tailoring products more quickly for specific customer needs.”
Bottom Line: The answer is “Yes”, DELL was an excellent candidate for an LBO