April 19, 2013

Declining PC Sales and the Death of Blackstone's Dell M&A Ambitions


Just over a month ago, Blackstone Group decided to involve itself with Dell, and began working to put together a Dell deal that would deliver more value to all investors than the original $24-billion leveraged buyout deal that Michael Dell and Silver Lake Partners had put on the table. Several weeks into it Blackstone even began to look like a potential white knight for Michael Dell, as discussions moved in the direction of possibly keeping him on board as the company's CEO after Blackstone made the acquisition.

But it's over now. Blackstone has apparently stepped off the Dell M&A bus. That doesn't mean the company may not just as suddenly step back onto that bus, but today's news is that Blackstone is out of Dell's future. Blackstone exits without any likely losses to show for its interest; as has been previously noted, Blackstone has a deal with the special Dell committee to be reimbursed up to $25 million for any expenses Blackstone incurred while working to assemble a formal bid.

The Blackstone prospect of keeping Dell as CEO certainly didn't cheer us up - Michael Dell, regardless of his legendary status, has accomplished nothing over the last three years and the various strategies he put in place have all backfired - leaving Dell entirely exposed to a declining PC market without any viable ways to adapt to change.

Mobility should have been the key to adapting to the future, but Dell failed to drive this in any meaningful ways. As the CEO, he is to blame - the buck stops at his desk.

Given these egregious and now massive failures it was perhaps infuriating to many of us that he would so baldly try to take Dell private at investors' significant expense and entirely to his benefit. Dell would have rolled his 16-percent share of Dell into the original Silver Lake Partners deal that would have kept him in place as CEO.

That Blackstone would look to accommodate his CEO desires was no less appalling, especially as Blackstone began to look a bit shaky in its resolve to pull off the deal without him in place. Dell was threatening not to roll his shares into the deal without the CEO guarantee. Not that Blackstone's own possible other CEO choices were any better - in fact they were amazingly laughable.

So then, why the change of heart?

As underlined in a letter to the special Dell board committee handling the deal negotiations for Dell, Blackstone specifically pointed to "declining personal computer sales industry wide" as a key factor in its decision. Hand in hand with that, following a series of due diligence financial investigations and studies into Dell's books, Blackstone also underscored concerns about the declines in Dell's operating income.

The Real Deal-Breaker

Hmm…Has Blackstone been hiding under a rock these last several years? Is there truly anything in the above paragraph that anyone did not already know? We sincerely doubt it - and in fact we cannot bring ourselves to believe any of this had anything to do with Blackstone bowing out.

More than likely it began to clearly understand just how badly Michael Dell has managed the company over the last three years, and having gotten into bed with him as the new entity's CEO likely began to look like the very bad deal is would have been destined to become. Another factor that may have been in play in its decision, according to unnamed sources, is that Dell has a great deal of cash in hand residing outside of the United States. There is likely no way to leverage that cash, given today's US corporate tax environment, in any way that would be materially beneficial to a leveraged buyout - at least not without incurring a huge multibillion dollar tax bill. With the company now positioned for massive declines in revenue this was hardly a feasible outcome.

But we believe that Michael Dell as CEO is the real Blackstone deal breaker. That is where the due diligence no doubt pointed to as the weakest link in the Dell chain and in any future with Michael Dell as Dell's CEO.

Does this put the advantage back in the hands of Silver Lake and Dell to get the original deal nailed down? It doesn't hurt, but it likely also leaves the other player in the game, Carl Icahn, in a better position to pull off his own deal. Meanwhile, Southeastern Asset Management, the largest outside shareholder with just over eight percent of Dell's stock in hand, is likely to look to Icahn as the deal direction to go with.

As we've noted in previous coverage, we continue to root for Icahn in this deal. As should all of Dell's underwater investors.




Edited by Braden Becker




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