* Parties paying $13.65/share in cash
* Microsoft putting up $2 billion loan
* Dell shares rise 1.1 percent, still below offer price
By Poornima Gupta and Nadia Damouni and Greg Roumeliotis
SAN FRANCISCO/NEW YORK, Feb 5 (Reuters) - Michael Dell
struck a deal to take Dell Inc private for $24.4
billion in the biggest leveraged buyout since the financial
crisis, partnering with the Silver Lake private equity firm and
Microsoft Corp to try to turn around the struggling
computer company without Wall Street scrutiny.
The deal, which requires approval from a majority of
shareholders excluding Dell himself, would end a 24-year run on
public markets for a company that was conceived in a college
dorm room and quickly rose to the top of the global personal
computer business - only to be rendered an also-ran over the
past decade as PC prices crumbled and customers moved to tablets
and smartphones.
Dell executives said on Tuesday that the company will stick
to a strategy of expanding its software and services offerings
for large companies, with the goal of becoming a full-service
provider of corporate computing services in the mold of the
highly profitable IBM. They played down speculation that
Dell might spin off the low-margin PC business on which it made
its name.
Dell did not give specifics on what it would do differently
as a private entity, angering some shareholders who said they
needed more information to determine whether the $13.65-a-share
deal price - a 25 percent premium over Dell's stock price before
buyout talks leaked in January - was adequate.
"This feels like the ultimate insider trade. Why weren't the
plans and projections that Michael Dell has going forward been
shared with me and other shareholders?" said Frederick "Shad"
Rowe, general partner of Greenbrier Partners and a trustee of
the $22 billion Texas Employees Retirement System. Rowe said he
dumped about 400,000 shares of Dell on Tuesday, adding, "I was
so irritated I didn't want to think about it anymore."
Dell spokesman David Frink said the board had conducted an
extensive review of strategic options before agreeing to the
buyout to ensure that the best interests of all stockholders
were served.
Although Dell shares were trading at more than $18 a year
ago, many analysts said they believed the majority of
shareholders will accept the buyout because of pessimism over
the growth prospects of the PC business.
"A private Dell is likely to more aggressively cut costs, in
our view. But we think merely restructuring only postpones the
inevitable, creating a value trap," said Discern Inc analyst
Cindy Shaw. "Dell needs to do more than reduce its cost
structure. It needs to innovate."
Dell was regarded as a model of innovation as recently as
the early 2000s, pioneering online ordering of custom-configured
PCs and working closely with Asian component suppliers and
manufacturers to assure rock-bottom production costs. But it
missed the big industry shift to tablet computers, smartphones
and high-powered consumer electronics such as music players and
gaming consoles.
As of 2012's fourth quarter, Dell's share of the global PC
market had slipped to just above 10 percent from 12.5 percent a
year earlier as its shipments dived 20 percent, according to
research house IDC.
Some of Dell's rivals took pot shots at the deal, in
unusually pointed comments that reflect how bitter the struggle
is in a commoditized PC industry that has wrestled to reverse a
decline in sales globally.
Hewlett-Packard Co, which itself has suffered years
of turmoil in the face of challenges in the PC business, said in
a statement that Dell's deal would "leave existing customers and
innovation at the curb," and vowed to exploit the opportunity.
Lenovo, which consists largely of the former IBM
PC unit, referred to the "distracting financial maneuvers and
major strategic shifts" of its rival while emphasizing its own
stability and strong financial position.
The deal will be financed with cash and equity from Michael
Dell, $1 billion cash from private equity firm Silver Lake, a $2
billion loan from Microsoft Corp, and between $11
billion and $12 billion in debt financing from Bank of America
Merrill Lynch, Barclays, Credit Suisse and RBC Capital Markets.
The company said Michael Dell will contribute his 16 percent
stake in the company but did not say how much cash he would
inject. The company will now conduct a 45-day "go-shop" process
in which others might make higher offers.
"Though we were hoping for a higher price, we trust that the
Dell board has properly done its job by conducting a process
open to any third-party offers and reviewing all strategic
options," said Bill Nygren, who manages the $7.3 billion Oakmark
Fund and $3.2 billion Oakmark Select Fund, which have a $250
million position in Dell.
"Should we hear evidence to the contrary, we'll raise a
ruckus."
Sources with knowledge of the matter said Dell's board,
advised by the Boston Consulting Group, had considered
everything from a leveraged recapitalization to a breakup of the
company before agreeing to the LBO.
Although the deal will load Dell with more debt, some Wall
Street analysts said that was relatively low compared to the
cash the company generates.
Bernstein Research analyst Toni Sacconaghi said that if Dell
were to use 40 percent of its annual cash flow of about $2.5
billion to $3 billion to pay down debt, a sale of the company in
about five years could net Silver Lake, Mike Dell and other
investors close to $10 billion, or 5 times free cash flow at the
time.
Helped by acquisitions, Dell has been building a business
selling servers, IT services and other products for corporate
clients that - while still dwarfed by IBM's and HP's - is
growing at a near-10 percent clip. Critics say it will not be
easy for Dell to beat IBM and HP in this area, no matter what
its corporate structure.
Sales of PCs still make up the majority of Dell's revenues.
Dell said in a regulatory filing that no new job cuts were
expected but it indicated more acquisitions down the road. The
company has spent $13 billion since fiscal 2008 to acquire more
than 20 companies including several large software and services
companies as it seeks to reconfigure itself as a broad-based
supplier of technology for big companies.
"We recognize this process will take more time," Chief
Financial Officer Brian Gladden told Reuters. "We will have to
make investments, and we will have to be patient to implement
the strategy. And under a new private company structure, we will
have time and flexibility to really pursue and realize the
end-to-end solutions strategy."
Gladden said the company's strategy would "generally remain
the same" after the deal closed, but "we won't have the scrutiny
and limitations associated with operating as a public company."
Shares of Dell closed 1.1 percent higher at $13.42.
FALL FROM GRACE
Michael Dell returned to the company as CEO in 2007 after a
brief hiatus but has been unable to engineer a turnaround thus
far. Analysts said Dell could be more nimble as a private
company, but it will still have to deal with the same difficult
market conditions.
There is little history to suggest whether going private
makes such a transition easier. IBM's famously successful
transition from hardware vendor to corporate IT partner took
place while it was trading on public markets.
Freescale, formerly the semiconductor division of Motorola,
was taken private in 2006 for $17.6 billion by a group of
private equity firms including Blackstone Group LP,
Carlyle Group and TPG Capital LP. Analysts say the resulting
debt load hurt its ability to compete in the capital-intensive
chip business. Freescale cut just under 5 percent of its work
force last year as it continued to restructure.
Microsoft's involvement in the Dell deal piqued much
speculation about a renewed strategic partnership, but the
software company is providing only debt financing and Dell said
there were no specific business terms attached to the
transaction. Dell has long been loyal to Microsoft's Windows
operating system, which has been at the heart of its PC business
since its inception.
Microsoft's loan will take the form of a 10-year
subordinated note with roughly 7 percent to 8 percent interest,
a source close to the matter told Reuters.
The Dell deal would be the biggest private equity-backed
leveraged buyout since Blackstone Group LP's takeout of the
Hilton Hotels Group in July 2007 for more than $20 billion and
is the 11th-largest on record.
The parties expect the transaction to close before the end
of Dell's 2014 second quarter, which ends in July. News of the
talks first emerged on Jan. 14, although they reportedly started
in the latter part of 2012. Michael Dell had previously
acknowledged thinking about going private as far back as 2010.
J.P. Morgan and Evercore Partners were
financial advisers, and Debevoise & Plimpton LLP was the legal
adviser to the special committee of Dell's board. Goldman Sachs
was financial adviser, and Hogan Lovells was legal
adviser to Dell.
Wachtell, Lipton, Rosen & Katz was legal adviser to Michael
Dell. BofA Merrill Lynch, Barclays, Credit
Suisse and RBC Capital Markets were financial
advisers to Silver Lake, and Simpson Thacher & Bartlett LLP was
its legal adviser. Lazard Ltd advised Microsoft.
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