How Michael Dell’s financial engineering created a fortune


Michael Dell’s first fortune came from the sale of custom computers. But the kind of engineering that’s about to restore it to the top of the tech world is more financial in nature.

Mr Dell outlined his plans on Monday for a return to Wall Street, five years after an acrimonious departure that showed little love lost on either side. The PC pioneer complained that stock market short-termism left no room for a longer-term view of his company’s turnaround, while rebel investors led by Carl Icahn claimed he was buying Dell back cheap.

Since going private – and then adding storage maker EMC in a massive second takeover – Mr Dell has led consolidation in older parts of the IT market, particularly in the equipment.

His company has become “an execution machine,” said Gartner analyst Craig Lowery – although there have been bumps in the road, such as a fall at EMC in part because of what the analyst said. called “the distraction” of the acquisition. .

Yet much of the value Mr. Dell has created through his takeovers has little to do with the PCs, servers and storage devices that make up the bulk of Dell Technologies’ sales, the name of its new private technology conglomerate. These older parts of the technology market aren’t growing much and Dell has failed to come up with a compelling strategy to address the cloud computing market where much of the industry’s future lies, Ms. .Lowery.

Instead, Mr. Dell benefited from clever negotiation and financial engineering. Based on figures released on Monday, he was able to turn a 14% stake in his former PC company, worth $3.5 billion, into a 72% stake worth $35 billion. dollars in its expanded tech conglomerate.

In this he was supported by Silver Lake Partners. The Silicon Valley private equity group contributed $1.8 billion, according to a person familiar with Mr. Dell’s dealings. His stake is now worth around $11 billion.

Based on Dell’s own estimate of its value, and including all of its debt, the company had an enterprise value of around $120 billion before Monday’s news. That compares to the $92 billion combined global value of the Dell and EMC takeovers.

Most of the increase, however, can be attributed to a jump in shares of vmware, a separately managed data center software company that was majority owned by EMC and is now under the control of Dell. Dell’s stake in VMware has grown by some $26 billion in less than two years.

Wall Street on Monday quipped that Mr. Dell’s latest plans do not include a full merger of his company with VMware — at least for now. In relief, shares of the software company jumped 10%.

The latest transaction is designed to get him out of a straitjacket created by his previous deals.

In 2016, to take full control of EMC without having to sell part of its stake in VMware, Dell came up with an ingenious sleight of hand. As partial payment, he issued a follow-on stock that was nominally tied to the performance of his VMware stake – although the owners of the new stock had no claim to Dell’s assets or VMware’s earnings. That didn’t stop Dell from suggesting that the follow-on shares would have the same value as VMware’s separately traded common stock, which came with full rights.

$35 billion

The value of the stake that Michael Dell holds in his namesake company

He turned out to be extremely optimistic. The trailing stock fell at a deep discount to VMware common stock and was more than 40% lower for most of its life. But for Mr. Dell, it was a case of mission accomplished: based on the low value of the follow-on shares, his cash and EMC stock purchase had actually only cost $58.50. billion, not the aggregate value of $67 billion advertised.

Pulling out the tracking stock is now a priority for Dell as the company seeks to iron out a complicated capital structure, find a market on Wall Street for its own shares and give itself the flexibility to close more deals.

The plan unveiled on Monday was to reimburse holders of the tracking stock, which trades under the ticker symbol DVMT, by offering them a price that offsets part of the 40% discount. Dell said it would pay the $21.7 billion cost of this transaction in cash (itself funded by a $9 billion special dividend from VMware) and common stock issued by Dell, which would then become a listed company.

To facilitate the deal, a committee of two independent Dell directors representing tracking stock owners said it surveyed DVMT holders and “negotiated” with Dell for a fair price.

Monday’s bid of $109 per share was nearly $25 above the level of the trailing stock at the end of last week. But it was still $38 below VMware common stock — a gap that widened on Monday, as VMware rose another $15. An investor decried the offer, calling it nothing more than an “opening shot” in a battle that will run until November, when tracker holders will vote on the deal.

That left Mr. Dell facing something familiar: another fight with Wall Street over how to divide the spoils. Only this time, the price will be to put his company back on the stock market, not make it disappear.


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