As far as mysteries go, this one kind of disappoints. Michael Dell and his private equity partner, Silver Lake, want us to believe that they have a secret plan for reviving the fortunes of the struggling PC maker, a plan they insist they can only pull off if they take the Austin-based company private in a $24.4 billion leveraged buyout. Forget the incontrovertible evidence of a company and industry in decline, they say—the falling revenues, declining margins and competition-via-commoditization. Focus instead on … the hypnotic power of Michael Dell’s insistence that the company’s best days are ahead.
Can he be serious? Actually, he can. I’ve interviewed dozens of CEOs in my career, and Michael Dell was unquestionably the most boring of them all—he can’t not be serious. In this instance, though, it’s more like he’s being duplicitous. The best-intentioned private equity deals seek to improve a flailing company’s fortunes by giving management a kick in the ass. But this isn’t one of those. This is private equity as vulture investor; Dell’s best days are long gone, and the game here is to start picking away at the carcass before it’s even dead.
In return for his blessing of the deal, Silver Lake has offered to increase the founder’s stake in his company from 15.7 percent to 75.9 percent, with Silver Lake owning the rest. Of course, he’s going to be behind some $15 billion in additional debt at that point. That added burden will surely expedite the company’s journey to its final resting place, but the players in this deal obviously think they’ll be able to extract their payoff through share buybacks, special dividends and the like before that happens. On that point they’re probably being truthful; the public markets wouldn’t countenance an insane leveraging of this sort. If you’re going to do something that stupid, you probably need to be doing it on your own dime.
Yes, I know that’s not exactly news. What is? The fact that Blackstone, which had entered the fray with a tentative $14.25-per-share offer—superior to Silver Lake’s $13.65 bid—dropped out of the running on April 19 after getting a look at the company’s books. Volume in the stock tripled that day, and the shares fell 3.9 percent to $13.40 per share. That left Dell and Silver Lake with the only “formal” offer for the company, and it has taken pressure off the consortium to raise it any further. (Carl Icahn is still sniffing around, but my bet is that he’ll decide that he doesn’t need the headache. He’s also probably too busy counting his profits from his well-timed investment in Netflix.)
Last Tuesday, Dell also approved $91.1 million in retention bonuses. We’ve all heard this noise before—the whole “holding onto key executives” being a life-or-death decision. I’d argue that there’s a real question about who at this company is even worth “retaining” considering that they missed the boat on both tablets and smartphones and have also overseen a multiyear decline in market share. But a man’s got to take care of his buddies when he can.
While Michael Dell did point out last week that the company was the only one of the top five PC makers to gain market share both sequentially and year-over-year in its latest quarter, that doesn’t change the fact that both HP and Lenovo have been eating its lunch for several years now. And while increased share is obviously better than the opposite, we’re also talking about gaining share of a shrinking pie. Overall, PC shipments fell 14 percent in the first quarter of 2013.
As for Michael Dell himself, his “retention bonus” is a quintupling of his equity stake in the company if the deal goes through. Theoretically, then, the equity value of Dell would have to drop by 80 percent before he’s in the red. Are you starting to see what he sees in this deal?
He’s certainly got a better vantage than some other people. A suggestion by PC magazine (which is obviously going down on that same ship) that Dell hire ousted JCPenney exec Ron Johnson and open up a bunch of retail stores might actually take the “laugh riot” prize away from Dell’s own inexplicable optimism. The story came two and a half weeks too late to be an April Fool’s joke, so columnist John Dvorak was apparently serious himself when he called the idea of opening mall-based stores Dell’s “biggest opportunity.” Like many of us, I have on occasion found myself ingesting the wrong substances out of a state of utter boredom, but I think someone needs to knock on Mr. Dvorak’s office door and see how he’s doing—because the idea has all the hallmarks of a mid-acid-trip epiphany that loses its punch when considered by someone still tethered to reality.
One serious reaction to the latest news: Oakmark Funds, a major Dell shareholder, sold out of its Dell positions in several funds after Blackstone’s withdrawal. In doing so, it offered some of the first honest words spoken about Dell’s prospects since this whole melee started. “We were surprised and disappointed when, after extensive due diligence of non-public information, Blackstone said that it was alarmed by Dell’s rapidly deteriorating financial situation.” It’s not often you get a chance to engage in legal insider trading, and the folks at Oakmark didn’t let this one pass them by.
But let’s get back to the secret plan. If Dell had anything real up its sleeve, those “key executives” should have played those cards long ago. The whole charade actually reminds me of Kozmo.com. That little gem of Internet-boom euphoria delivered candy, magazines and DVDs to customers in a handful of major cities, raising $250 million from a Murderers’ Row of VC and corporate backers before blowing up in spectacular fashion. The CEO, Joseph Park, had somehow convinced those investors that the company had a “secret” logistics algorithm that would allow it to make urban delivery by bicycle—a fairly straightforward business to model—profitable. It didn’t. (I spent the last summer of Kozmo’s existence ordering Jenna Jameson videos over the phone with an ex-girlfriend, so I was a fan of the service, even if I knew that it wasn’t going to last. The relationship, that is. Well, that and Kozmo.com. And you read that right: we ordered them on the phone, not over the Internet. Kozmo’s “secret” plan also included phone operators.)
In a letter to employees last week, Michael Dell reiterated what by now is a pretty ridiculous refrain. “First, I want to be very clear about what we’re trying to do and why. Going private will allow us to continue our transformation but do it much faster. We will have private investors that share our strategic vision and are willing to see it through, even if it means making some tough trade-offs today to position us for success down the road. If we were to remain a public company, I believe it would be more difficult to move fast and aggressively because of the short-term focus of the market.”
Why has no one called him out on this bullshit? What, exactly, is it about being a public company that would hinder the execution of whatever strategy it has in mind, other than the public markets’ aversion to crushing a company with debt? And while he talks about the short-term focus of the market, it would seem to me that in this instance, the market is squarely focused on the long term, which is why the stock has for quite some time been trading barely above what you’d get selling the whole thing for scrap. That said, at nearly $13.50, it’s now trading well above its January pre-deal-rumor levels of less than $12 a share. If I were a shareholder in this company, I would take the money and just give the goddamned thing to him and his pencil-pushing financiers.
“I am very confident we are headed toward a fantastic outcome for Dell, our customers and our team,” Mr. Dell also told his employees. Raising the question once again: Michael Dell, are you serious? Well, what else can he say at this point? As a noted singer-songwriter once wrote, “Too much of nothing … can turn a man into a liar.”