Analyze and value the company.

Assume you are a private equity fund manager, and you are consider to invest in Dell at current year, write a paper to analyze and evaluate the company. Use the following materials and links as background and references. I also attached a sample note, which you need to use it as the template of this paper, and a case related to Dell. Sample Recommendation Note https://www.forbes.com/sites/connieguglielmo/2013/10/30/you-wont-have-michael-dell-to-kick-around-anymore; Forbes, Oct 30, 2013http://www.dell.com/learn/us/en/uscorp1/secure/acq-dell-silverlake, Oct 23, 2013, Official Websitehttps://dealbook.nytimes.com/2013/02/05/dell-sets-23-8-billion-deal-to-go-private/, NYT, February 5, 2013 https://www.fastcompany.com/3005689/why-dell-decid…http://www.sec.gov Definitive proxy for DellDell Inc Form S-1 from the time of the buyout announcementSoutheastern Asset Management Challenges Buyout at Dell; Harvard Business School, Product #: 114015-PDF-ENG
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For the exclusive use of H. XU, 2018.
9 – 1 1 4 – 01 5
REV: MAY 2, 2017
PAUL HEALY
SURAJ SRINIVASAN
ALDO SESIA
Southeastern Asset Management Challenges
Buyout at Dell
Michael Dell and Silver Lake both had the kind of numbers on the company that we did, which is of course
the reason they wanted to take Dell private. We said over and over, â??Itâ??s not about the PC!â?
â?? Staley Cates, president and CIO, Southeastern Asset Management
In October 2013, Staley Cates, president and chief investment officer at Southeastern Asset
Management Company, reflected on events of the prior ten months. Southeastern had been in a fierce
battle with Dell Inc.â??s board to prevent Michael Dell and Silver Lake Partners, a private equity firm,
from taking Dell private. Several shareholder votes had been cancelled just as Southeastern seemed
poised to win the battle. But in the end, on September 12, 2013, Dellâ??s shareholders approved the
transaction and Southeastern lost their dissident campaign. Cates and his colleagues were frustrated
with the outcome and wondered what, if anything, they should have done differently.
Southeastern Asset Management
Southeastern Asset Management was founded in 1975 as a 100% employee-owned independent
investment advisory firm that aimed to employ a value investing approach to long only equity
investing â??with a long-term time horizon in strong businesses with good people at deeply discounted
prices.�1 By 2013 the company, led by CEO and founder Mason Hawkins and Cates, had
approximately $31 billion of assets under management, and offices in Memphis, London, Singapore,
and Sydney. Both men liked to play up the firmâ??s physical, if not philosophical, distance from Wall
Street.2
The firmâ??s Longleaf Partners funds provided opportunities for institutional investors to invest in
focused portfolios, large- and small-cap U.S. stocks, and international stocks. Since inception, the
Longleaf Partners Fund (focused on large-cap U.S. stocks) had generated an average annual return of
11.5% (versus 9.6% for the S&P 500 Index), the Longleaf Partners Small-Cap Fund had an average
return of 11.4% (versus 10.0% for the Russell 1000), and the Longleaf Partners International Fund had
generated an average return of 9.4% (versus 5.1% for the MSCI EAFE Index).3
Southeasternâ??s team of ten research analysts was charged with identifying â??individual companies
that were misunderstood, underfollowed, temporarily challenged, or intensely disliked.�4 All
Professors Paul Healy and Suraj Srinivasan and Senior Case Researcher Aldo Sesia (Case Research & Writing Group) prepared this case. It was
reviewed and approved before publication by a company designate. Funding for the development of this case was provided by Harvard
Business School and not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as
endorsements, sources of primary data, or illustrations of effective or ineffective management.
Copyright © 2014, 2017 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-5457685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized,
photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
This document is authorized for use only by HETING XU in Private Equity Basics taught by ARCHANA HINGORANI, HE OTHER from Apr 2018 to Oct 2018.
For the exclusive use of H. XU, 2018.
114-015
Southeastern Asset Management Challenges Buyout at Dell
analysts at the firm scrutinized the resulting stock recommendations to determine which 18 to 22
would make the most attractive investment opportunities. Richard Hussey, chief operating officer
and principal, explained the companyâ??s investment approach:
We look for securities that we believe are fundamentally mispriced, that are good
businesses run by capable management. Everything we do is predicated on trying to
close that gap between the current market price and what we deem to be the intrinsic
value of the company. We donâ??t get involved in micromanaging the companyâ??s
operations, but we do spend time understanding what the business is doing and suggest
to management how to allocate capital more effectively.
Southeastern was known for its conservative long-term approach to investing and for working
with the management and boards of companies in its portfolio to improve their business results, but
it was not shy about becoming more actively engaged. For example, in 2012 Southeastern took a lead
role in publicly advocating for change at Chesapeake Energy Corp., a natural gas company, in which
it held a 13.6% stake. As a result of declining performance and persistent questions about its CEO and
corporate governance, Chesapeakeâ??s shares were down 41% since Southeastern began building its
stake in the company six years earlier.5 Southeasternâ??s activism and the accompanying media
scrutiny prompted the board to strip the CEO of the chairmanâ??s position and eliminate the program
that allowed the CEO to borrow money from the company to buy an interest in wells Chesapeake
drilled. Eventually Southeastern and Carl Icahn won seats on the board and other independent
directors were also added. â??The clear impression we had was that Mason [Hawkins] was a long-term
investor, and he wasnâ??t a breakup artist. It gave us a real sense of commitment,â? said one former
board member.6
Cates joined Southeastern as an analyst in 1986 after graduating from the University of Texas. He
became president of the company in 1994, and co-managed the firmâ??s Longleaf Partners funds. In
2006, Cates was awarded Morningstarâ??s Domestic Equity Fund Manager of the Year along with
Hawkins. In addition to his work with Southeastern, Cates was an active social entrepreneur in the
Memphis community, co-founding and leading several Christian-based youth and education
initiatives, and helping to attract the NBA franchise Memphis Grizzlies.
Dell Inc.
Michael Dell started Dell from his dorm room at the University of Texas, Austin in 1986. By
bypassing the middleman and selling custom-built computers directly to customers, Dell became the
number one computer systems manufacturer (primarily personal computers, or PCs) in the world in
2001.7 In March 2004, Michael Dell stepped down as CEO, but remained the firmâ??s chairman.
By 2005, PC rivals had closed the efficiency gap with Dell and were enjoying resurgent sales at
retail stores.8 In 2006, for the first time since its founding, Dell grew more slowly than the overall
market and rival Hewlett-Packard overtook Dell as the largest PC manufacturer.9 Further, Dell
seemed slow to react to the move to more mobile computing. In January 2007, Michael Dell returned
as CEO, and set out to transform the company from a PC maker to an enterprise solution and services
(ESS) provider of software, networking, data storage, and security to large companies.
To accelerate its transformation, Dell embarked on a series of acquisitions. The largest of these was
the September 2009 $3.9 billion acquisition of Perot Systems, seller of a wide range of business IT
services. In building its ESS business, Dell spent more than $13 billion on acquisitions since fiscal year
2008. As a result, 34% of Dellâ??s $56.9 billion in 2013 revenues came from ESS compared to 24% in
2
This document is authorized for use only by HETING XU in Private Equity Basics taught by ARCHANA HINGORANI, HE OTHER from Apr 2018 to Oct 2018.
For the exclusive use of H. XU, 2018.
Southeastern Asset Management Challenges Buyout at Dell
114-015
2009. This increase came at the expense of the PC segment whose share of revenues declined from
59% in 2009 to 50% in 2013 (See Exhibits 1a, 1b, and 1c for Dellâ??s income statement, balance sheet,
and cash flow statement, Exhibit 2 for Dellâ??s business segment revenue, and Exhibit 3 for business
segment performance of HP Inc., a competitor to Dell.)a Yet despite this progress, Dellâ??s five-year
stock performance lagged the broader market. For the five years ending January 1st 2013, Dell had
underperformed the Nasdaq Index by over 65%.
Dell first showed up on Southeasternâ??s list of undervalued stocks in 2005. Southeasternâ??s analysis,
Cates explained, showed â??a gap between price and valueâ? because the market was not recognizing
the transformation taking place at Dell. â??Over time we attributed less than 20% of our value of Dell to
the PC business,â? Hussey noted. â??We did underestimate how fast and how violent an impact the
decline in the PC business would have on Dellâ??s intrinsic value; that said, we recognized the
companyâ??s transformation while the marketplace continued to fixate on the PC business.â?
Lee Harper (HBS â??89), Southeasternâ??s head of client portfolio management, explained, â??Over the
years we had discussions with Dellâ??s management on how to tell their story more effectively; how to
get out the word that in fact it was transforming. It had a growing and profitable enterprise business.
That Dell was not just a PC company any longer. But the message never got out there as we hoped.�
As a result of its analysis, Southeastern began accumulating Dell stock. By January 2013, it had
bought 146 million shares in Dell at a total cost of $2.4 billion, around $16.66 a share.10 With Dellâ??s
stock price continuing to languish, Cates and his team devised a more ambitious plan to unlock its
potential value. On June 15, 2012, Cates contacted Michael Dell to suggest the possibility of taking the
company private and allowing shareholders who did not want the immediate liquidity such as
Southeastern to participate in such a transaction. He provided an example of how Southeastern and
Michael Dell could roll over their shares (that is, they would substitute their shares in Dell for shares
in the private company) and take Dell private along the lines of how Clear Channel had essentially
gone private with a small number of remaining owners. After Southeastern provided additional
information to Michael Dell over the next few weeks, he responded that he would think about the
idea.11 Michael Dell and Southeastern spoke again in July and then had no further discussions.
Taking Dell Private
In August 2012, Michael Dell informed Dellâ??s board of directors that he wanted to join forces with
a private equity firm to take the company private in a leveraged buyout transaction. The board
quickly formed a special committee of four independent directors led by Alex Mandl to consider the
matter (see Exhibit 4 for their bios). In the fall, the special committee retained J.P. Morgan and Boston
Consulting Group (BCG) to review proposals and strategic alternatives for the company.12 The scope
of BCGâ??s work included analysis of the future of the PC business, prospects for Dellâ??s transformation,
and financial cases to model various sensitivities around possible cost savings targets. (See Exhibit 5
for a summary of BCGâ??s analysis.)
Michael Dell had met with private equity firms Silver Lake and Kohlberg Kravis Roberts (KKR) to
discuss eachâ??s interest in partnering with him on a take-private transaction. Both firms with Michael
a Prior to February 2013, Dell had four business segments, based on customer type (Large enterprise, Public, Small and
medium business, and Consumer). In its 2013 annual report, Dell announced that it was changing its business segments based
on the types of services offered (Enterprise servers and networking, Services, Software and Client), and reported sales for the
new segments.
3
This document is authorized for use only by HETING XU in Private Equity Basics taught by ARCHANA HINGORANI, HE OTHER from Apr 2018 to Oct 2018.
For the exclusive use of H. XU, 2018.
114-015
Southeastern Asset Management Challenges Buyout at Dell
Dell submitted preliminary offers to the board on October 23, 2012. Silver Lake offered $11.22 to
$12.16 a share, with Michael Dell rolling over his 16% equity stake in the company.13 KKR proposed a
deal for $12 to $13 per share, with the expectation that Michael Dell and Southeastern would join the
offer and that Michael Dell would contribute an additional $500 million.14 However, in December,
KKR dropped out of the process, citing its unease â??with the risks [. . .] associated with the uncertain
PC market, and concerns [. . .] regarding the competitive pressures the company faced.�15 A few days
later, Mandl contacted a third private equity firm, but it quickly dropped out with â??concerns about
the negative trends in gross margins and earnings in the PC business [. . .].�16
Michael Dellâ??s Strategic Rationale
Michael Dell contended that Dellâ??s transformation could not take place as a public company. (See
Exhibit 6.) In a presentation to investors he explained:
[T]he Companyâ??s transformation is still in its initial stages. Significant incremental
investment is required [. . .] to restore the Company to health in the long term. In the
short term, however, [these investments] are likely to lower gross margins, raise the
Companyâ??s operating expenses and raise capital expenditures, resulting in lower
earnings [. . .]. Taking these actions as a public company could adversely affect Dellâ??s
stock price. A continuing decline in public share price would threaten to adversely affect
customer perception and make it more difficult to retain employees. As a public
company we must take a more cautious approach to our transformation because we
must consider how our stock price will react [. . .]. This hurts the speed and efficacy of
the transformation and is not good for the long-term health of the company.
Risky transformation has a higher probability of success as a private company. Given
the market environment facing the Company, the significant investments and aggressive
steps the Company needs to take entail significant risk [. . .] As a private company
owned by two financially strong equity investors, Dell will be better able to aggressively
pursue its long-term business strategy and thereby increase the speed and likelihood of
success. Private owners [. . .] will be able to absorb the risks of the transformation and
the likely near-term adverse effects on earnings. Financially strong equity owners have
the resources to provide additional capital if needed. As a private company, stock price
fluctuations will no longer be a concern.17
The Transaction Structure and Price
In January 2013, Michael Dell/Silver Lake increased their offer to $13.65 per share of common
stock for a total of roughly $25 billion, about $28 billion including transaction costs.18 This
represented a 25% premium on Dellâ??s closing share price on January 11, 2013, when rumors of the
transaction hit the market.19 Many business news outlets had carried the story within a few days.
To fund the deal (see Table 1 below), Michael Dell and Silver Lake planned to borrow $13.75
billion from banks and an additional $2 billion from Microsoft Corp. Microsoftâ??s involvement was
largely seen as a defensive move to maintain Dellâ??s commitment to the Windows operating system.20
Silver Lake planned to put in $1.4 billion, and Michael Dell and his wealth management firm would
contribute $750 million. The remainder was to be paid for with $7.4 billion of Dell Inc.â??s cash, all but
$500 million of which was held by foreign subsidiaries. At the 35% U.S. corporate tax rate,
repatriation could result in a tax bill as high as $2.6 billion. In addition, Michael Dell would swap 273
million of his Dell shares valued at $13.36.
4
This document is authorized for use only by HETING XU in Private Equity Basics taught by ARCHANA HINGORANI, HE OTHER from Apr 2018 to Oct 2018.
For the exclusive use of H. XU, 2018.
Southeastern Asset Management Challenges Buyout at Dell
Table 1
Proposed Deal Financing
Source
Debt
Dell Inc. cash
From Microsoft Corp
Cash from Silver Lake
Cash from Michael Dell
Total
Source:
114-015
Amount
($ billions)
$13.75
7.40
2.00
1.40
0.75
$25.30
Comments
Including loans and revolving credit facilities
$6.9B held by foreign subs, subject to 35% U.S. corporate tax rate
7.25% unsecured subordinated notes
Dell Inc. Schedule 14A, May 30, 2013,
http://www.sec.gov/Archives/edgar/data/826083/000119312513242115/d505470ddefm14a.htm, accessed April 7,
2014.
On February 5, 2013, Dellâ??s board released an announcement saying that it had accepted the
Michael Dell/Silver Lake offer (see Exhibit 7 for the full board announcement). The deal, however,
required the approval of holders of a majority of outstanding shares, excluding shares held by
Michael Dell or certain members of Dellâ??s management team and board. If approved, it would be the
biggest buyout since the Blackstone Groupâ??s $26 billion takeover of Hilton Hotels in the summer of
2007.21
Southeasternâ??s Reaction
On February 5, one week prior to the boardâ??s announcement of the buyout offer, amidst market
rumors of an impending deal, Southeastern and its outside counsel met with Mandl and expressed its
opposition to any deal in the range of $14 or $15 per share that did not allow existing large
stockholders to roll over a portion of their equity interests into the new company.22 Southeastern
believed that Dellâ??s long-term stockholders had funded the successful transformation from a PC to an
ESS business and should, therefore, be given the opportunity to benefit from their investment.
Critiquing the Strategic Rationale
Although Southeastern had approached Michael Dell about taking Dell private, the firm did not
believe going private was necessary for the company to make a successful transformation to an ESS
business. It offered examples of firms such as Apple, IBM, and Philips that underwent significant and
successful transformations as public companies. Apple was able to make major R&D investments and
build an integrated ecosystem as a public companyâ??taking its market capitalization from $1.7 billion
(2007) to $658 billion (September 2012). Lou Gerstnerâ??s decision as CEO of IBM to exit mainframes
and PCs for software and services required transforming a legacy culture. Southeastern indicated that
public companies such as Nokia and Kodak had failed to transform because of a continued focus on
legacy products, while Dell had spent more than $13 billion on acquisitions to build its ESS
business.23 (See Exhibit 8 for more of Southeasternâ??s critique of the buyout proposal.)
Southeastern pointed to the seven potential take-private value levers that BCG identified and
concluded that Dell could use most of them even if it remained a public company (see Exhibit 9).
Southeastern argued that sophisticated investors, such as pension and hedge funds and investment
firms like itself, were quite capable of absorbing the risks associated with a conservatively leveraged
balance sheet that would be necessary to continue Dellâ??s transformation.
5
This document is authorized for use only by HETING XU in Private Equity Basics taught by ARCHANA HINGORANI, HE OTHER from Apr 2018 to Oct 2018.
For the exclusive use of H. XU, 2018.
114-015
Southeastern Asset Management Challenges Buyout at Dell
Critiquing the Transaction Structure and Price
With its 8.4% stake, Southeastern was Dellâ??s largest outside investor. â??Weâ??re not opposed to
companies being taken private, but we want it at a fair price,â? Harper explained. â??We donâ??t want it
stolen from us. Just because you donâ??t think youâ??re getting a fair deal doesnâ??t mean you want to
spend the time, effort and dollars to fight it. But, we thought that there was enough chance of
improving our outcome and our clientâ??s outcome that it was worth the fight.â?
On February 8, 2013, Southeastern sent a letter to Dellâ??s board expressing its â??extreme
disappointment� in the offer:24
[We believe] modest valuatio …
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