Dells future still has many twists and turns

By Quantum Capital Fund

Recently, there has been a lot of focus on the PC industry and its fight for survival while the mobile revolution is gaining momentum. The International Data Corporation paints a pretty grim picture for the industry and many have been as bold as to say that we have seen the end of the PC as we know it.

Yet there is still a heated debate around the Dell privatization deal. The latest news is that two of Dells biggest shareholders, Carl Icahn and Southeastern Asset Management, are working furiously to raise $7-billion in a bid to table leveraged recapitalization as a feasible alternative to privatization. But which way should the company go? In order to answer this we need to consider both options.

Reuters reports that Icahn and Southeastern Asset Management have initiated talks with banks and asset managers to line up commitments for as much as $7 billion in bridge loans to back their leveraged recapitalization proposal for Dell Inc, banking sources told Thomson Reuters LPC on Thursday.Jefferies & Co is leading the deal. Reuters adds that Icahn and Southeastern are looking to lock in the financing before Dell shareholders meet in July to vote on a rival take-private offer from CEO Michael Dell and Silver Lake Partners. Icahn and Southeastern are seeking at least $5.2 billion and as much as $7-billion in lender commitments, sources said.

Under the Icahn proposal, shareholders could hold onto existing stock with the option of receiving either a distribution of $12 per share in cash or $12 per share in stock valued at $1.65 per share.

Meanwhile, Michael Dell and Silver Lake Partners, who are looking to take the company private for $13.65 per share, or $24.4-billion, have already received $13.75-billion in debt commitments from a number of banks and Microsoft Corporation to back their offer. Bank of America Merrill Lynch, Barclays, Credit Suisse and RBC Capital Markets agreed to provide $11.75-billion in bank lines and Microsoft agreed to purchase up to $2-billion in subordinated notes.

Leveraged recapitalization is the process whereby equity is substituted for debt. Bonds are used to raise money which is then used to purchase stock or pay dividends. Leveraged recapitalization can either mean minor changes in the company’s operations and leadership structure or it could mean a complete overhaul of the company. Icahn has been outspoken about his lack of faith in Michael Dell.So one feels that the leveraged buyout would mean that a change in leadership is inevitable. This means that there would also be a change in vision because there is no point in swopping one leader for another which has the same objectives for the company. The money gained will be used on research and development to either increase Dell’s capacity in mobile products or to increase the company’s capacity in building laptop/hybrid products.

Privatization is the process whereby a publicly listed company delists off the stock exchange. The shares will be liquidated and after due diligence is undertaken; shareholders will be paid out according to the perceived value of the shares. Management will then be transferred from the hands of shareholders into the hands of those who initiated the buyout, in this case Michael Dell and Silver Lake Partners. This would mean that the company is under less pressure to adhere to strict reporting structures and the company will have a bit of leeway when it comes to meeting revenue targets. Possible more money can be spent on research and development in a private model than in a leveraged recapitalization model.

At the moment, the fate of the company is still in the hands of its shareholder as they have to approve either offer. And there is value in both models. The question is: which model will shareholders find most attractive?

Icahn has publicly stated in the past that the Silver Lakes proposition significantly undervalues shareholder investment in the company, yet his offer of $7-billion is significantly less than Silver Lake’s $24-billion. This means that Icahn’s view of the PC industry is that the industry is not dead in the water and that there is value to be found in public participation.

The Silver Lakes offer paints a far more subdued picture of the industry and offers shareholders a way out while the company finds its feet. Silver Lakes is being very realistic in noting that the nature of the technology industry has changed and that Dell has struggled to keep up with this change.