Icahn and Blackstone to take separate runs at Dell
Time for Big Mike to pull an EMC and spin out Dell 2.0 cloudy biz
Those who wonder just how much Michael Dell wants to take control of the struggling IT giant that bears his name don't have long to wait.
Private equity firm Blackstone Group and activist investor Carl Icahn are both reported to have tossed in bids to take control of Dell, the company, before the "go-shop" period of the leveraged buyout put together by Dell, the man, and buddies Silver Lake Partners, Microsoft, and a slew of banks.
Dell has yet to file the documents that update its proxy statements regarding the proposed $24.4bn takeover that Michael & Friends announced on February 5. Those updates will no doubt include the offers that a special committee of Dell's board, created to consider the leveraged buyout offer and to solicit other offers for 45 days with the help of Evercore Partners. So we only know the rumors that are swirling around as those in the know flap their gums. As was the case when the rumors of a potential buyout started as 2013 got going, the rumors got a lot of the details garbled, so take this all with a grain of salt until those updated proxy statements are available from the US Securities and Exchange Commission.
Big Mike faces off against his former Johnson
The offer from Blackstone Group is significant in that David Johnson, who managed mergers and acquisitions for Dell, left the Texan IT giant back in December 2012 to become a senior managing director of private equity.
Johnson rose up through the ranks at IBM, eventually being put in charge of M&A at Big Blue and no doubt doing the due diligence on the proposed acquisition of Sun Microsystems by IBM, which got underway in the fall of 2008 and which was shut down in the spring of 2009, leaving the way open for Oracle to move in. Johnson moved to Dell to take over M&A in May 2009 (perhaps related to the Sun deal, perhaps not), and IBM actually sued to stop Johnson from moving to Dell, the company.
Johnson did not have anything to do with initiating the $3.9bn takeover of Perot Systems by Dell, and he was behind Dell's unsuccessful bid to buy storage array maker 3PAR, which went to rival Hewlett-Packard for $2.4bn in September 2010. During Johnson's tenure, Dell did over 20 deals worth a total of $10bn.
Eating Dell, as Blackstone is offering to do according to a Reuters report, would be the largest deal that Johnson has ever completed. And a suspicious mind would say that Johnson had an inkling (or perhaps more than an inkling) that his former boss was going to try to buy Dell at a low point in the stock price, when the PC biz was going to cause the stock to get slammed, and therefore smelled an opportunity that maybe Blackstone might be interested in getting a piece of.
Blackstone is rumored to have approached current Oracle co-president Mark Hurd, a former CEO and chairman of Hewlett-Packard, to run Dell if Blackstone prevails.
According to the Reuters report, Dell is also getting set to tell Wall Street that its operating profit will be $US3bn for fiscal 2013, not $3.7bn. That is sure to bring the stock price down, and to make the current offer of $13.65 per share put together by Michael & Friends look more attractive. Unless, of course, the news that offers by Blackstone and Carl Icahn get Wall Street all jazzed for a bidding war and drive the share price even higher. Dell's shares closed at $14.14 a pop on Friday, giving it a market capitalization of $24.71bn and a bit above the dough that the deal put together by Dell, the man, is offering.
A report at Bloomberg over the weekend said it heard the same rumors about the Blackstone bid to takeover Dell, and said further that Icahn Enterprises, which has been amassing a stake in Dell for an unknown period of time, had also submitted a deal to takeover Dell at a higher price than what Michael & Friends are offering.
In a filing with the SEC two weeks ago, Icahn told the Dell board that his best guess was that the company was worth about $22.81 per share, which is a little lower than the $23.72 per share that Dell's largest outside shareholder, Southeastern Asset Management, has said it thinks Dell is worth. It will be funny to see if Blackstone or Icahn Enterprises come up with anything even close to this number with their takeover bids, should they eventuate. Both would be more likely to work out a deal – and perhaps together – that is significantly below their own numbers but above that of the Michael & Friends consortium. The difference between the numbers would, of course, be their profits, to be carved out of the company. Both SAM and Icahn have said that what they really want Dell to do is stay public and do an $11.86 or $9 special dividend, respectively, after repatriating some overseas profits and borrowing a ton of money.
But that was before Blackstone and Icahn made deals to try to take over all of Dell themselves. No matter what, you can bet that Blackstone and Icahn would saddle Dell with debt, extract the cash, and perhaps sell off the financing and PC businesses of the company to focus on servers, storage, networking, systems software, and services, creating in effect a Baby Blue. That may be a very 1999 approach, but it seems to be the popular armchair strategy for both HP and Dell these days.
What Dell really needs to do is something truly dramatic and merge with Samsung Electronics and Amazon Web Services and create the new infrastructure for both consumers and companies for the next decade. Actually, what Dell needed to do was see that it needed to do this back in 2005, before Amazon and Apple set the pace for clouds and the future of the personal computer. Which smells an awful lot like a 3270 dumb terminal made smart with pretty pictures talking to a distributed cloud that smells an awful lot like a mainframe.
Taking Dell private addresses none of these issues, as does having Blackstone or Icahn or anyone else buy the company. Rather than go private, maybe what Dell, the man, should have done is spun out its hot technology and take it public to add value.
Time to forge Dell 2.0
Try this experiment. Take the Data Center Services cloud system business, which pushes well above $1bn in machines a year, and spin it into a new arm's length subsidiary, like EMC and VMware are doing with the Pivotal big data and platform group and, in fact, as EMC did when it acquired VMware and then sold off a 20 per cent stake to Wall Street.
Now, this new biz needs a Hadoop distribution, and Dell can create its own Linux operating system, KVM hypervisor, and OpenStack cloud control freak easily enough. Toss those into Dell 2.0. Rip out the appropriate parts of the services and client businesses, sprinkle in more systems management and services like Boomi, maybe buy ARM server chip upstart Calxeda, and suddenly you might have a company with a market valuation of perhaps $10bn because Wall Street multiples are completely absurd.
Yes, the Dell 1.0 business would take a market capitalization hit at first from the creation of Dell 2.0, just like VMware's high valuation put pressure on EMC's market cap initially. But people start thinking of them as separate companies even though the math doesn't work out, and the rising stock price is real money once you sell some shares in the shiny new Dell 2.0.
The real answer, of course, is for Dell not to have missed so many important revolutions in IT when it was trying to figure out how to become Baby Blue. Dell should not have been caught flat-footed by the rise of Amazon, Apple, Google, and others who are building this distributed mainframe/client world. But getting caught by surprise is exactly what happens to most companies most of the time because they are too busy running their current businesses to see new ones. It is amazing, then, that Dell has been around since 1984, and even more amazing still that HP has been around since 1939 and that IBM has been around since 1911. Truly amazing. ®
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