Contents

Executive Summary.................................................................................................... 2
Recommendations...................................................................................................... 3
Concluding Remarks................................................................................................... 4
Responses to Questions............................................................................................. 5

Executive Summary
12th September 2013, the day, when, Dell publically announced its going
private saga

has come to an end after months of rumors, legal battles,

uncertainties and multiple bids were emerged and sidelined. In June 2012,
Southeastern Asset Management, major shareholder of Dell, approached
owner, Michael Dell to explore strategic options available to Dell on backdrop
of weak financials, shrinking PC market share & growth, falling market cap,
cutthroat competition and threat of new products from tech innovation giants
like Apple. Denali Holdings, buying group, consisting of Michael Dell and
Silver Lake Partners, made an LBO offer to acquire outstanding $20b worth
shares, offer comprised of $18b debt and $2b equity. Since Michael Dell was
an insider/ executive and a bidder as well, corporate governance rules
necessitated an independent committee, to watch over all this process, to
look after shareholders interest and avoid any conflict of interest. Bidding
started form $11.22 and it ended upon $ 13.88 (divided inclusive). Upon
special committees directions, several outside financial, legal, business
advisory firms rendered their opinion in this context, highlighting challenges
to Dell as public company, options available to Dell, challenges to biding firm
itself. Fairness opinion was seek to judge best price range for shareholders ,
which determined a price tag of $13.65 as most suitable offer that fell within
most of the price ranges arrived at by multiple financial models plus it was
acceptable to special committee as well. One downside of this price arrival
mechanism was most of the bankers/ advisors had relied on pro forma
assessments, for a company with weak multiples, heading for management
buyout, heavily financed via debt. Acting in the very best of shareholders
interest, special committee, signed $13.65 per share agreement with Denali,
subject to 45 days GO SHOP provision, that was extended later on, for
higher bid search, but ended nowhere. This agreement attracted lot of legal
filings and criticism by other major shareholders like Southeastern and Icahn
capital, which offered a leveraged recapitalization at $14 per share.
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However, special committee rejected opposition opinion for sake of

inadequate financial details, restructuring terms thereafter. Another key
development from committee was to eliminate absent vote classified as No
Vote rule, and achieved a bid price up to $13.88 in return. This move
attracted backlash from dissidents, Icahn moved to court to stop voting
under new law, but was kicked out on legal grounds and deal was struck at
the end for $13.88 per share.

Recommendations
Dells decision to go private seemed justified, need of time and correct one
given multiple options of leveraged recapitalization, disaggregation and do
nothing. Although the tag price can be debated so long but given case
insights, Dell sale to Denali at $13.88 per share is the first step in right
direction. Following are merits of going private rather than opting to other
options like leverage recap, divesture etc.:

Under Michael Dells full control, we believe New Dell will be in better
place to serve the needs of customers well since no large customer has
broken up with Dell despite its hardships, i.e. Dells customer base is
strong, viable and longstanding because of Michael Dells strong

leadership skills that will be fully utilized in private mode .

Public firms are under keen observation every quarter to meet
external expectations or dividends delivery, putting undue pressure

on management.
Many public firms had to manage stock price at all costs, which turns
their attention to meeting short term goals/expectations rather being

strategic.
Private firms can save lot of time and resources by not having to
report/ file on timely basis to SEC like many public firms have to do. In
case of Dell it becomes more vital with its presence over 100 countries
across the globe.

As a general rule of capital markets, stock price is generally based on

markets feeling about companys future prospects, we believe that
for past few years Dell has been severally under-valued, reason being,
PC market is dying, which to great extent is miss-understood. PC
growth has been slowly not negative, which is very much in coherence
with market trends, for example on launch of Windows 8. So if, market
itself has undervalued Dell, why should not take this opportunity and
buy back at low, why Dell pay premium to price that is under stated by
market? Why shouldnt Dell buy stocks at low, transform itself into new
mode, reinvent, and come back to public markets later on when it is in
full swing to deliver, reaping benefits of buying low, selling high.

Privatization does come at some cost including:

Lack of access to public markets i.e. large place to raise new low

cost equity
Rising debt will add problems to already troubling firm with low
profit margins, new debt will accumulate total debt up to $22b ($5b

old +$18b new) . This may raise alarms to lenders.

A private firm with heavy debt will incur huge debt service cost that

could, otherwise, be spend in long term projects

Decreased public visibility and communication restrictions
Privatization lessens the stock price liquidity since it will no more be

trading on public markets

Raising debt is also not an easy task for private firms vs public since
existence of private firms are largely consolidated to life of its

owners, in Dell case, Michael Dell.

With $2b loan to Dell LBO, by Microsoft, is seen as a strategy by
later to take control on hardware side since Windows 8 is not going
well. With close ties to Microsoft, dell wont be able to enjoy
ultimate autonomy.

Transformation is not an easy going way forward especially when

many losers are there, only the time is ultimate judge to vet
Dells go private decision.

Concluding Remarks
This case is a classic example of debt laden management buyout in recent
years comprises of financial analytics, corporate governance, shareholders
voting rights, legal issues and above all long wait for shareholders to
conclude it all. Some critics stated, Michael Dell was fighting for his own
personal wealth, some said, special committee played in hands of owners.
Financially speaking,

bankers kept throwing multiple numbers stating

multiple price ranges while analysts continued arguing about financial

viability and Dell ability to turnaround. Logically, Dell as private company is
seen as a way to align all of its assets to become an end-to-end solutions
provider. Being private lays the foundation for strengthened synergies
between the end-user computing and enterprise solutions groups, on the
contrary, it also provides for more drastic innovation at the server and
storage layers to challenge competitive pressures from HP, IBM, EMC and
NetApp. This approach is very vital, since many data centers increasingly
focus on converged infrastructure and a heavier emphasis on software to
manage their environments.

Responses to Questions
1. Did the independent committee of the board compared the
proposals accurately and make the right call?
Apparently, committee tried to act in best of shareholders, all proposals that
were received, given due attention. Starting from Denali, committee initially
rejected a bid of $12.70 and pursued to get better one for shareholders
wealth maximization. Blackstone put an offer after Go SHOP period but still
entertained by committee, it was bidder who quit at the end on weak
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financials ground. Southeastern / Icahn proposals of $23.72 and $14.00 were

also reviewed but their proposals lack substance as noted by board and
Judiciary. Industry experts and analysts rejected their proposal for leveraged
recapitalization on the grounds that this proposal would push already
troubled company in more debt swamp. Secondly, it lacked real equity
investment. Board also fought hard on getting other proposals that is clear
from its efforts to extend Go Shop period, delaying in voting, aggressive
marketing got get high bid. Despite all opposition, Southeastern and Icahn
were given due time and consideration by board.
2. Were the numbers provided sufficiently clear to evaluate
management's offer?
No. It was clearly evident that on number of occasions, management
provided overly optimistic data to directors/ advisors; starting from
September 21 Case, which posed a very stable picture going ahead, in
reality which was rejected by JMP and industry. The November results of
company proved the above stated plan wrong and sponsor A quits.
Secondly, PC growth sales were also seen as growing in future while it was
not in reality.
3. Did Icahn and Southeastern present a competitive offer?
Theoretically, both put up their proposals to get higher price while pursuing
other shareholders not to go with Denali, however; their proposals lacked
financial grounds, leverage recapitalization was clearly not a right option for
Dell at now, directors did hard to get higher bid in Go Shop period but none
of the said firms came up with a brilliant proposal that could lead to No to
Denali.
4. Was there an alternative to using private equity to finance the
deal?

Given the financial, technical, business segmental and public market

sentiments about Dell, it was certainly a need of time for Dell to go private,
via private equity financing only. Private equity firm i.e Silver Lake which is
backing Dell has a long history of investing in troubled tech companies like
dell, and it has posted excellent returns over the years. So, Michael Dell
made a right choice by choosing a private equity instead of using public
equity or debt financing. In either case, Dell would have to meet the
expectations of shareholders/lenders, quarterly reporting and dividend/
interest payments would force Dell to reap short term benefits to satisfy
shareholders at the cost of long term business success.
Another aspect of getting private equity not public is, in private equity
investment, the investor has full control over business and can actively
pursue his strategies, this would be impossible in case of public financing
where you have a board and committee to look after shareholders interest.
If we compare private equity over debt financing, it has major plus over debt;

5.

Medium to long term horizon

PE investor is committed until Exit
PE provides flexible capital source to fund future expansions
Less restrictive than debt
Was the management bid a hostile bid?

No. Michael Dells offer was not a hostile since it was initiated by
management itself, while in hostile bid, bidder doesnt arrive on an
agreement with board/management, and rather hostile bidder directly goes
to shareholders or tries to sack management/board. On the contrary, Icahn
bid was hostile.
6. Would the outcome be different if a hostile predator proposed
the same deal?
If a hostile bidder, Icahn in this case, had filed same proposal than odds are it
could be considered by committee. Indeed board try to get higher bid as far
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as possible, but no one came up with a deal as suitable & sensible as Denali
had.