February 5, 2013 / 2:31 PM / in 5 years

REFILE-UPDATE 5-Dell to go private in landmark $24.4 billion deal

* Parties paying $13.65/share in cash
    * Microsoft putting up $2 billion loan
    * Dell shares rise 0.8 percent, still below offer price

    By Poornima Gupta and Nadia Damouni
    SAN FRANCISCO/NEW YORK, Feb 5 (Reuters) - Michael Dell will take Dell Inc
 private for $24.4 billion in the biggest leveraged buyout since the
financial crisis, a deal that allows the billionaire chief executive to attempt
a revival of his struggling computer company without Wall Street scrutiny.
    The deal, which requires shareholder approval, 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 downplayed 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 to convince skeptics who say it missed the big industry shift to tablet
computers, smartphones and high-powered consumer electronic devices such as
music players and gaming consoles. Sources with knowledge of the matter said
Dell's board had considered everything from a recapitalization to a breakup of
the company before going the leveraged buyout route, but did not elaborate.
    "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."
    The deal will be financed with cash and equity from Michael Dell, cash from
private equity firm Silver Lake, a $2 billion loan from Microsoft Corp,
and debt financing from a consortium of banks. The price of $13.65 per share
represents a 25 percent premium over Dell's stock price before news of a pending
deal leaked in January.
    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
    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.
    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 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. 
    Michael Dell returned to the company as CEO in 2007 after a brief hiatus,
but has been unable to engineer a turnaround thus far. Dell's focus on corporate
computing in recent years has yet to yield results - and critics note competing
successfully against incumbents, including IBM and HP, will not be easy no
matter what the corporate structure.
    Sales of PCs still make up the majority of Dell's revenues. Analysts say
continued restructuring to focus on the corporate market may entail job cuts and
more costly acquisitions. The company has acquired several large software and
services companies in recent years 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."
    Michael Dell, who has quietly built a highly successful investment firm even
as the fortunes of his namesake company have waned, will contribute his 16
percent share of Dell's equity to the deal, along with cash from his MSD
Capital. Bank of America Merrill Lynch, Barclays, Credit Suisse and RBC Capital
Markets will offer debt financing.
    Shares of Dell were up 1.2 percent at $13.43 in morning trading.    
    Analysts said Dell could be more nimble as a private company, but it will
still have to deal with the same difficult market conditions. IBM's famously
successful transition from hardware vendor to corporate IT partner took place
while it was trading on public markets.  
    There is little history to suggest whether going private makes such a
transition easier. 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. 
    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. 
    Microsoft's involvement in the 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 that will
be the "closest thing to equity," with roughly 7 percent to 8 percent interest,
a source close to the matter told Reuters.
    Banking sources said the debt financing package for the deal will total 
between $11 billion and $12 billion to back the leveraged buyout. The final size
of the financing depends on what portion of the company's existing notes remain
outstanding, sources added. The banks are expected to begin reaching out to
other lenders to begin syndicating the loans as early as Tuesday. 
    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.
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