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In The News
Vol. 45 No. 2
March 5, 2013
Farmer in the Dell
By Bill Dickneider
W
ith nothing more than a
large planter box, Sophia
didn’t think of herself as a
farmer. Like a farmer, however, she
had to plant the seeds and care for
the plants if she expected an eventual harvest. Her friends didn’t believe
anything would grow, but Sophia
was intent on raising home-grown
tomatoes to make her special salsa.
Seeds in a Dorm Room
W
hen he started a computer
company in his college dorm
room in 1984, Michael Dell probably
didn’t think of himself as a farmer either. Yet with $1,000 of seed capital,
he began to grow his new company.1
Envisioning great growth, he knew the
company would need more financial
nourishment. So in 1988 Dell Computer raised $30 million by selling
stock to the public in an initial public
offering (IPO). A share sold for $8.50
– about 9 cents in today’s price,
adjusted for stock splits since then.2
The company grew rapidly, entering
the Fortune 500 in 1992 and becoming the top seller of PCs by 1999.
As the company’s shares soared,
Michael Dell and other stockholders
enjoyed an abundant harvest. So did
consumers, who liked Dell’s “buildto-order,” online sales and its quality
products and services. Part of the
harvest also went to workers, who
gained thousands of new jobs.
In the early 2000s, however, the
financial weather began to change.
The growth of Dell’s PC sales slowed
as competitors began offering similar
or superior computers and services.
Dell responded by introducing products and services, other than computers, aimed at business customers.
1
Monthly Stock Prices
Jan. 2002 – Feb. 2013
$45
$40
$35
$30
$25
$20
$15
$10
$5
$0
Nasdaq
(right scale)
3500
3000
2500
2000
1500
Dell
(left scale)
1000
500
0
‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13
Source: Yahoo!Finance, Nasdaq, http://tinyurl.
com/aqt5hoc; Dell, http://tinyurl.com/ank65yq.
To underscore its effort to become
more than a producer of PCs, the
company changed its name in 2003
from Dell Computer to Dell Inc.
“Changing the company’s name to
‘Dell Inc.’ represents Dell’s evolution
from strictly a computer hardware
company to a diverse supplier of
technology products and services,”
reported the board of directors.3
As competitors ate into Dell’s sales of
PCs, however, its stock began to fall
(Chart 1). By 1996, Hewlett-Packard
had replaced Dell as the top seller
of PCs. Later, when smartphones
and tablets began eroding computer
sales throughout the industry, Dell’s
stock fell further.
The company still earned money,
but investors worried about the
falling growth of its sales revenue.
Meanwhile, the company continued
its march toward more profitable
products and services, such as
data storage, servers, network gear,
and software. To further this goal,
the company began buying many
businesses, such as AppAssure, a
producer of backup software.
Dell’s falling stock price suggests
that investors haven’t shared Michael
Dell’s view of a bright future for the
company. So Mr. Dell offered to turn
the business into a private company
not traded on the stock market.
On January 10, 2013, the board of
directors announced it had accepted
a proposal from Michael Dell and
Silver Lake Partners (a private equity
company) to buy the company by paying stockholders $13.65 for each share
of their stock. That price was a premium
of about 25 percent above the stock’s
closing price of under $11 just before
the buyout’s announcement.
Leveraged Buyout
A
t $13.65 per share, the total cost
of buying all shares from stockholders would equal about $24.4
billion. Chart 2 on the next page
shows that most of the funds for the
buyout would come from borrowing,
which would act as a financial lever on
the smaller amount contributed by Mr.
Dell and Silver Lake. The proposal was
therefore a leveraged buyout because
the borrowing (leverage) would
enable the buyers to purchase the
company with their own funds being
1
In The News
only a fraction of the buyout price.4 For the buyout to occur,
however, the majority of all stockholders (besides Michael
Dell, who owns about 14 percent of the company’s shares)
will have to approve.5
2
Sources of Buyout Funds
$3.70 billion ............Michael Dell offers his Dell shares
$0.75 billion ............Michael Dell offers cash
$1.40 billion ............Silver Lake Partners offers cash
$13.75 billion ...........New borrowing (debt)
$2.00 billion ............Loan from Microsoft
$2.80 billion ............Other cash
$24.40 billion ..........Total Buyout Offer
Source: Market Watch, http://tinyurl.com/abtd9ro.
Feast or Famine?
A
s the chief executive officer, Mr. Dell has a legal obligation to act in the best interests of the stockholders.
The company’s board of directors concluded the buyout
offer would be “fair to, and in the best interests of, the
Company and its stockholders.” 6 Disagreeing, however,
were some shareholders who believed the offered price
of $13.65 undervalued the company. The largest outside
shareholder, Southeastern Asset Management, opposed
the plan because it believed the stock was worth nearly
$24 per share. Also against the deal was the mutualfund company, T. Rowe Price Group, which believed the
buyout price was below the stock’s value.7
With analysis from independent financial advisors, Dell’s
board of directors concluded that “the transaction offers
an attractive and immediate premium for stockholders and
shifts the risks facing the business to the buyer group.” 8 The
risk, of course, is that the company might fail in its transformation from a seller of PCs to a producer of business
products and services.
The company believes it will have a better chance to
succeed if it becomes a private company. It could then
patiently pursue its restructuring without investors worrying about its short-term performance reported in financial
statements each quarter (every 3 months).
“I believe this transaction will open an exciting new chapter for
Dell, our customers and team members. We can deliver immediate value to stockholders, while we continue the execution of our
long-term strategy and focus on delivering best-in-class solutions
to our customers as a private enterprise,” said Michael Dell.9
Other companies like Apple, however, have made substantial changes and flourished while remaining public
companies traded in the stock market. Edward Conard, a
former private-equity manager, put it this way:
“I believe the public markets [stock markets] work surprisingly
well…I think they have a much longer-term perspective than
most people realize. It’s hard to make the case that Mike Dell
can’t make the changes he wants to make because of quarterly
earnings.” 1 0
As the CEO and majority owner of a privately owned company, Michael Dell would invest his capital in the remaking
of the company. Chart 3 presents some of the company’s
latest financial results. What do you think it suggests about
the company’s future harvest?
3
Change in Dell’s Revenue by Product
4th Quarter 2012 to 4th Quarter 2013
Desktop PCs
-13.6%
Mobility (laptops, tablets)
-24.7%
Software & Peripherals
-11.1%
-3.1%
Services
Storage
-13.2%
Servers and Networking
-10.7%
18.7%
All Revenues Combined
0%
Source: Dell, Inc., Income Statement, http://tinyurl.com/ae3brn3.
To Think About
3If you owned stock in Dell, would you favor the buyout?
What would happen to your stock if shareholders don’t
approve the buyout? Explain.
3Do you think today’s historically low interest rates would
affect a decision to offer a leveraged buyout? Explain.
3A professor at the Stanford Graduate School of
Business said, “In a management-led buyout there
are obvious conflicts of interest.” What do you think he
meant? Explain.
1. Dell history, Dell, Inc. http://tinyurl.com/bgkoks4.
2. Dell, Inc., http://tinyurl.com/7bb5fwd.
3. Form DEF-14A, Definitive Proxy Statement, May 30, 2003, p. 12, SEC,
http://tinyurl.com/bdp2ohv.
4. The following websites offer brief descriptions of leveraged buyouts:
http://tinyurl.com/a5vxstk, http://tinyurl.com/2m3o9m.
5. SEC, Form 8-K, February 6, 2013, http://tinyurl.com/ao45fu3.
6. SEC, Form 8-K, February 6, 2013, http://tinyurl.com/ao45fu3.
7. Abram Brown, “Dell Buyout: T. Rowe Price Joins Growing Revolt Against
$24.4 Billion Deal,” Forbes, Feb. 2, 2013, http://tinyurl.com/bkrasde.
8. Schedule 14A, SEC, http://tinyurl.com/agpmmp3.
9. SEC, Exhibit 99-1, http://tinyurl.com/ao5a5ne.
10. Bloomberg TV, http://tinyurl.com/a4cscn2.
Copyright ©2013 SIFMA Foundation for Investor Education. In The News is published by SIFMA Foundation for Investor Education, exclusively for The Stock Market GameTM,
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