In 2013, personal computing billionaire Michael was at a crossroads.
Dell Technologies, the computer company he founded in his dorm at the University of Texas, was suffering from declining demand for PCs and its inventory was stagnant. Along with private equity firm Silver Lake Partners, Dell launched a $ 25 billion leveraged buyout of its company. The controversial deal sparked an epic battle with billionaire Carl Icahn, and it has since generated one of the biggest bargains ever on Wall Street.
With financial chemistry, piles of cheap debt, and a shrewd takeover partner in billionaire Silver Lake co-CEO Egon Durban, Dell has effectively increased the value of its Dell Technologies share by $ 3.6 billion. in 2013 to currently $ 39 billion. Dell’s overall net worth, which recently topped $ 50 billion, has more than tripled in less than a decade. Once risking becoming an afterthought, Dell Technologies is now trading a market cap of nearly $ 80 billion.
Dell Technologies announced on Wednesday that it would be handing over its crown jewel asset, an 81% stake in cloud infrastructure giant VMWare, to public shareholders. The maneuver, which is slated to be completed this year, will simplify and deleverage Dell’s tech empire. It will also give the clearest view to date on his coup.
When Dell privatized its company in 2013, it held 15.6% of its total outstanding inventory, worth about $ 3.6 billion based on the terms of the LBO. It was valued at a paltry sum at Dell’s heyday, but it presented an opportunity. With $ 9 billion in cash at the time, Dell’s PC business and its heavy investments in software and technology infrastructure were undervalued. Instead of spending years trying to rebuild enthusiasm for the title, Dell partnered with Silver Lake for a record-breaking buyout, pumping its shares and $ 750 million of its money into the deal. Billionaire activist Carl Icahn has cried foul, organizing a group of shareholders to resist the takeover. Dell and Silver Lake won the brutal fight by raising their price slightly.
After spending a few years paying off the $ 15 billion debt used to fund the LBO, Dell and Silver Lake then found an even more undervalued target. In 2016, they orchestrated the massive $ 67 billion takeover of tech conglomerate EMC, a company more than twice its size. The acquisition added scale to Dell’s infrastructure business and gave it control of a handful of valuable subsidiaries, such as cybersecurity firm RSA and cloud software firm Pivotal. The hidden gem was EMC’s 81% stake in VMWare, a pioneer in the virtualization of enterprise technology infrastructure.
To swallow EMC whole, Dell and Silver Lake have relied heavily on financial engineering. They listed a publicly traded trailing stock to represent a 53% stake in VMWare, drastically lowering their cost of buying out of pocket. Still, the consortium has put in billions of new cash and raised tens of billions of dollars in debt, leveraging Dell heavily. At the time the deal was made, Michael Dell owned 70% of the combined company and his aggregate cost of Dell’s shares and cash was around $ 7.5 billion.
The case was masterful. VMWare’s value has skyrocketed as cloud computing infrastructure infiltrates IT departments around the world. And, once again, Dell and Silver Lake have found an undervalued asset to pounce on.
Follow-up stock representing 53% of VMWare’s ownership couldn’t keep pace with its booming stock, sometimes trading at discounts of around 40%. Dell and Silver Lake opportunely made a deal to remove it at a very bargain price, which infuriated Wall Street cops – billionaire Carl Icahn and Paul Singer’s Elliott Management. After a public trade, Dell and Silver Lake pulled the tracking stock for around 80 cents on the dollar, effectively pocketing billions of dollars for their gigantic LBO experiment.
At this stage, financial engineering was unprecedented. To withdraw the follow-up action, VMWare paid a special dividend of $ 11 billion to its shareholders. The public pocketed $ 2 billion and Dell, which owns 81% of VMWare, pocketed $ 9 billion. Using the dividend, plus $ 5 billion in new debt, and swapping a portion of the equity in their LBO project, now called Dell Technologies, they bought the follow-on stock.
“Creative financial engineering has served the interests of Michael Dell and Silver Lake over the years, including the creation and elimination of VMware tracking stock, although shareholders have also enjoyed the ride,” said Jordan Chalfin, senior analyst at CreditSights.
In the final act of the financial magic show, Michael Dell resolves the complexity, pays off his debts, and comes back to square one, albeit a much richer man.
Dell Technologies will soon sell its 81% stake in VMWare to shareholders and repay more than $ 14 billion in debt over the next 12 months, analysts say. Michael Dell will then hold significant stakes in two separate technology powerhouses listed on the stock exchange.
It will own 52% of Dell Technologies and 42% of VMWare, which currently trades at a market capitalization of around $ 70 billion. Dell’s VMWare shares alone are expected to be worth around $ 25 billion at current prices. And don’t bet against Dell Technologies, the company that needed a facelift when the LBO adventure began in 2013.
As part of the proposed spin-off, VMWare will pay an additional dividend of $ 11 billion to all of its shareholders, meaning Dell Technologies will pocket more than $ 9 billion. As a result, Dell will have received nearly $ 20 billion in cash from VMWare to repay debt and satisfy bondholders. With the dividend and other expected deleveraging, Dell Technologies will likely cut its debt in half and become rated investment grade.
It will be far from being a problem child in debt as a stand-alone business. According to Morgan Stanley, Dell Technologies is expected to generate EBITDA of $ 13 billion in calendar year 2021 and core debt is expected to end the year at around $ 10 billion. PC sales are growing steadily, helped by work from home trends, and the company has invested heavily in trends such as the move to the cloud. If Dell Technologies were valued at an enterprise value of 7 times EBITDA, that would imply the company is worth $ 48 billion. Michael Dell is said to be sitting on stocks worth around $ 25 billion.
Right now, the market gives Dell Technologies a valuation of $ 101 per share, making Michael Dell’s 385 million shares worth about $ 39 billion. For the first time, there are no gaping haircuts in the stock markets to exploit. There is peace among shareholders, growth to capitalize on, and a mine of precious assets remaining.
At $ 39 billion, Michael Dell’s shares are worth more than five times the money and the shares he invested in the deal. Silver Lake has achieved a similar rate of return on the billions it has invested. It’s the buyout deal of the decade.
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