Dell deal could reinvigorate PE credentials

By Paul Mackintosh - 28/01/13

Never mind the news that Morgan Stanley Private Equity Asia is nearing a US$750 million first close on the c.$1.5 billion target for its fourth fund – more fundraising comfort that Asia arguably does not need. Rather, turn your eyes back to the US and the thrills of big buyouts – big tech buyouts, what’s more. Yes, this whiff of the tech bubble era is brought to you by Dell, and the potential Silver Lake Partners/Microsoft-backed privatisation of the struggling Texan PC giant. If the deal comes off, it could value Dell at $23-24 billion, making this one of the top ten leveraged buyouts (LBOs) of all time.

Dell has long needed a business model reset – just like Sony, Hewlett Packard, and other former tech titans. Its stock fell 23% through 2012. Purchasing Alienware in 2006 has done little to revitalise the business. Dell is the world’s third largest PC manufacturer, but PC manufacturing is ferociously commoditised and now appears more and more a sunset-era technology, as consumers and investors alike fixate on tablets and mobile platforms – areas that Dell has conspicuously failed to migrate into. At least Microsoft, sometimes lumped together with these other yesterday’s heroes, has made more daring and convincing demonstrations of its relevance recently, with its mobile phone partnership with Nokia, own-brand manufacturing, and tablet-focused release of Windows 8. Dell may actually get most strategic benefit out of the deal by tapping Microsoft’s reinvigorated responsiveness to industry change. And Apple’s latest stock slide, 10% after missing sales expectations, shows that even the 800-lb gorilla is vulnerable in this market.

This remains a hugely ambitious deal, especially in these tough times. TPG Capital, mooted as a co-investor, has apparently already dropped out. And we are talking serious leverage, even though record low borrowing costs make LBO financing especially plentiful. Fitch, quoted by Bloomberg, estimates LBO debt of 4.5x earnings, which would make Dell the world’s most indebted computer manufacturer. Limited partners (LPs) including Temasek and the Canadian Pension Plan Investment Board may help finance the deal, according to the Financial Times. But doubt remains over the post-investment game plan to actually help Dell out of its hole, with or without the distractions of listed status.

If the deal does clear all the hurdles, it is a chance for private equity not only to book a big-ticket buyout to truly vindicate its post-crisis comeback, but also to buff up its turnaround credentials, and show that it really can revitalise troubled companies – in this case, one of the top three worldwide for this particular manufacturing area. It would also buttress Silver Lake’s reputation as a major tech investor, and the tech sector’s rep as a serious buyout venue. Watch this space.