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In the previous case study, we saw a classic case of Dell, which became the largest technology leveraged buyout ever, and also the largest company in terms of revenue to go from public to private in 2013. The $13.65-per-share deal for the world’s third-largest computer maker at the time, involved chairman Michael Dell, Silver Lake and Microsoft. The transaction

In the first decade of the new millennium, the PC business was growing rapidly. So naturally, many companies did well and Dell was one of them. In 2001, Dell became the world’s largest seller of PCs and enjoyed a decade of skyrocketing sales.

However, in 2011, things changed. The PC global sales reached their peak and the next year was the first of an 8-year streak of decline that lasted until the pandemic hit in early 2020. And where was Dell now? It had lost its #1 position in the US to HP and came #3 globally, behind HP and ACER. Tech giants like Dell, HP, Cisco, and IBM were walking dead. They would survive for years to come, they would sell some stuff, they would also make some money and they would do new things. But as tech giants, they were dead.

Many believed that Dell would perish like Kodak or Motorola. But Dell went on to change business strategies and transform their business model, to survive and thrive in those conditions.

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Laying the Foundation Stone for Dell’s Non-PC Business (Pre-Privatisation)

Dell expanded its software, networking, security and services offerings. Dell went on a $13bn buying spree, consuming more than 20 firms in the areas of data storage, systems management, cloud, security, data management in healthcare and software.

2009: Acquired Perot Systems for $3.9bn, at a 68% premium, to drive end-to-end IT services
2010: Acquired companies in storage, systems management, cloud computing and software: Boomi, Exanet, InSite One, KACE, Ocarina Networks, Scalent and Compellent
2011: Acquired Secure Works, RNA Networks and Force10, for enterprise capabilities
2012: Another half a dozen acquisitions including storage protection company Credant Technologies and software manufacturer Quest Software

Dell’s organisational structure was changed from one organized around customers (consumer, small business, public and large enterprise) to one built around the four operating units (PCs, services, software, servers and storage).

But Dell’s headlines focused on shrinking PC sales and market share, rather than on the fact that it had steadily built the non-PC business from $10bn to a "pretty impressive" $21bn in five years. Dell had more than five years to lead a turnaround and failed. Shareholders had seen a negative 43% return since Micheal Dell reclaimed the CEO job.

(Before proceeding ahead, please read one of my previous articles “Public Companies – Taking the Privatisation Route” case study, to understand the nuances of the Dell <> EMC merger)

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Understanding EMC empire

EMC played a vital role in the transformation of IT. It was founded in Aug-1979, and the company developed and sold computer memory systems. It evolved, and started developing and selling high-end, disk-based computer storage systems (both hardware and software); Finally, entering into the millennium, EMC continued its tradition of focused execution and sales excellence, while also relying on a long string of acquisitions for innovation and diversification. Some prominent acquisitions are listed below –

Dec-03: Acquired virtualization software vendor VMware for ~$635m. VMware had the potential to be EMC’s killer app. At the time of the acquisition, Joe Tucci, President and CEO of EMC said “VMware is the best investment I made in my life." That proved right, as in Aug-07, EMC offered 10% of VMware stock in an IPO and VMware’s market cap was $19.1bn, at the end of the first trading day (30x of the valuation, from the time since EMC invested in VMWare in Dec-03, till VMWare became public in Aug-07)
Jun-06: Acquired a digital risk management company with a focus on encryption and encryption standards, RSA Security for ~$2.1bn
May-12: Acquired Pivotal Labs, a provider of agile software development services and tools
May-15: Acquired Virtustream, a provider of cloud software and services

For decades, when businesses needed to store lots of data, EMC sold hefty machines packed with hard disks and some software for storing data on those hard disks. The trick was that the businesses could only get that software from EMC. So, anytime businesses wanted to store more data, they gave EMC more money. This made the company very rich.

Then little companies like Pure Storage came along and sold storage gear built around flash, a much faster alternative to hard drives, letting businesses juggle more data more quickly and, potentially, for less money. And eventually, cloud computing companies like Amazon came along, letting businesses store data on their machines. These machines sat on the other side of the Internet, but businesses could access them from anywhere, at any time. That meant businesses didn't have to buy hardware from EMC.

Breaking up EMC and VMWare: EMC and VMware could not continue under that structure. They are increasingly coming into competition with each other. An option for EMC was to buy VMware's public stub. However, EMC buying VMware would raise issues of fiduciary duty since VMware's shareholder base consists of predominantly growth investors, while EMC has a more value-oriented shareholder base.

EMC was under pressure from activist Elliott Management to break up the federation and was expected to announce a strategic move by 3Q 2015 or face renewed public calls by the activist. EMC also added a director with experience in take-private deals.

VMware CEO Pat Gelsinger, however, believed that the EMC group was inevitably moving toward a VMware-led approach. He proposed a downstream merger of EMC into VMWare.

Considering a downstream merger: A parent-subsidiary downstream merger is a merger of a parent into its subsidiary. The subsidiary survives and the parent disappears. In this case, VMware CEO Pat Gelsinger proposed the EMC acquisition by VMWare. EMC owned 80% of VMware and has faced calls from activist investor Elliott Management to sell its stake, prompting it to look at a host of strategic options in early 2015.

We have encountered Elliott Management before, in the “Public Companies – Taking the Privatisation Route” case study, as they were also a part of the largest US take-private in 2022 of Citrix where Evergreen Coast Capital, part of Elliott Management, participated along with Vista Equity Partners.

The two businesses complement each other: EMC specialises in hardware and VMWare in software. VMware is carrying the torch EMC took up decades ago, but instead of managing the workload of an enterprise with hardware-based infrastructure, it is using a virtual infrastructure stack. VMWare saw a 16% yoy growth in revenues compared with 2% growth for EMC. It was estimated that the merger would result in ~$950m of operational savings. This was consistent with EMC’s commitment to reduce costs by $850m by the end of 2017.

However, many top-level executives of EMC Group believed that the group shouldn't be broken apart, as it would place revenue synergies at risk. EMC also received interest from HP and Cisco, but the conversations failed to materialise as the market theme was moving away from EMC’s hardware-based storage to virtual clouds.

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Transforming Dell – The EMC Acquisition

The combination of Dell and EMC created the world’s largest privately controlled, integrated tech company.

The relationship between Dell and EMC goes back to 2001. In 2001, both tech giants partnered and signed a multi-year, multi-billion-dollar alliance for Dell to sell EMC’s CLARiiON storage. In Jan-11, EMC introduced VNX, a new family of unified storage systems combining the features of CLARiiON (mid-tier storage) and Celerra (network-attached storage). EMC garnered 8-9% of its revenue from its relationship with Dell. For Dell, the partnership accounted for 50% of its storage revenue.

In 2015, initially, EMC had approached Dell for the sale of a piece of this VNX unit, which was a $3bn revenue-making information storage business at the time, and constituted ~18% of EMC revenues. If Dell were to consider the EMC acquisition as a whole, there was no clarity on whether Dell would spin off the VMware business, and what would happen to EMC’s other businesses Pivotal and RSA.

Why EMC for Dell?

With market conditions not favourable for PC sales, EMC’s acquisition will help Dell chase trends such as digital transformation, the software-defined data centre, the hybrid cloud, converged infrastructure, and mobile and security
Combination of the world's biggest enterprise storage vendor with one of the largest server makers at the time, forming a giant that can serve a broad range of enterprise needs
In storage, product lines largely complement each other. EMC's products are geared towards larger enterprises while Dell is stronger at the low end, even though there's some overlap (between Dell's EqualLogic and Compellent arrays and EMC's VNX and Vmax). A deal would also make Dell a meaningful player in data protection, where it hasn't been able to compete against the likes of EMC's Data Domain and Avamar lines
VMware's current networking partner Cisco Systems could be substituted with Dell networking products
Unlike HP or Cisco, as a private entity, the combined Dell-EMC entity will have the freedom from market pressures that competitors such as HP can only dream of. Although this deal gets Dell very little in the cloud arena, companies will continue to buy an enormous amount of EMC products in the future. A shrinking market is not good for public companies, but for a private firm like Dell, that cash flow is delightful

In 2017, this transaction became the largest take-private in the history of buyouts, the largest technology acquisition in history and the largest North American M&A deal in any sector in 2017. It also represented the largest financing commitment for a technology deal ever, with up to $50bn in debt — more than 2x as large as any previous deal before 2017.

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Deal details

Buyers:

EMC had an 81% stake in VMware. Dell created a “tracking stock” for 53% of VMware (Class V Shareholders), which drew investors Carl Icahn and Paul Singer’s Elliott Management. Dell and Egon Durban’s Silver Lake owned the remaining 28%.
Dell, together with its owners: Michael Dell, MSD Partners (now called DFO Management, it is the family office that manages the capital of Michael Dell and his family) and Silver Lake
Dell, through its holding company called Denali Holding, has obtained $4.25bn from Michael Dell and partners, including funds affiliated with Silver Lake Partners, and Temasek
VMware acted as collateral for the $50bn that Dell raised to buy EMC, with financial backing from JPMorgan’s Jimmy Lee and Jamie Dimon

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Special Committee:

The board of both Dell and EMC formed special committees to evaluate the deal
Evercore Partners acted as financial advisors to the Special Committee of Dell’s Board
The EMC board unanimously voted “FOR” the approval of the merger agreement

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Go-shop Period:

No acquisition proposals were received during the go-shop period
Oracle or Lenovo were speculated to make a better offer; Oracle CEO Larry Ellison praised the deal profusely, but Oracle was busy curating its cloud strategy
The go-shop period was 60 days

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Termination fees:

In the event of EMC terminating the deal – A successful competing bid during the initial go-shop period would bear a $2bn (~3%) termination fee and for a competing bid post the initial go-shop period, the termination fee would be $2.5bn (~4%)
In the event of Dell terminating the deal (also called “reverse termination fees”) – it would have to pay EMC a termination fee of up to $6bn (~9%)

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Consideration paid:

EMC shareholders received $24.05-per-share in cash in addition to tracking stock linked to a portion of EMC’s economic interest in the VMware business
What is tracking stock? Tracking stocks are unique financial instruments that offer several distinct features. First, the value of a tracking stock is directly linked to the financial performance of the specific business segment it tracks, allowing investors to participate in the growth of that particular segment. In this case – investors could track the performance of VMWare with these Dell tracking stocks. Second, tracking stocks typically pay dividends based on the performance of the tracked business (VMWare), providing income for investors. Finally, although tracking stocks represent ownership in the parent company, they generally do not come with voting rights, as the parent company (Dell) retains full control over the subsidiary or business segment (VMWare).
Based on the number of EMC shares outstanding at the close of the transaction, EMC shareholders are expected to receive ~0.111 shares of a new tracking stock for each EMC share held at the close of the transaction. The tracking stock allowed investors to invest in VMware's financial performance without actually owning shares of VMware itself.
For illustrative purposes, say the valuation for each share of tracking stock is $81.78, the intraday volume-weighted average price for VMware. In this case, additional consideration received by EMC shareholders on account of EMC’s ownership in VMWare would be ~$9.10 ($81.78 * 0.111 shares). In this case, EMC shareholders would receive a total combined consideration of $33.15 per EMC share ($24.05 cash + $9.10 for tracking stock)
The total transaction would be valued at $67bn

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Organisation structure post-acquisition:

VMware remained a publicly traded company – EMC shareholders continued to own a 53% stake, while Dell and its investors had a 28% stake and the rest with existing shareholders

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Dell’s leverage: Dell, taken private by founder Michael Dell and Silver Lake in 2013 for USD 24.9bn, had ~$12bn in debt, making an EMC acquisition all the more difficult to finance. By the end of the EMC acquisition, Dell had $57bn of debt on its books.

What came next?

Sold Perot Systems unit to NTT Data for $3bn (at the loss of $800m)
Sold software unit to Francisco Partners and Elliott Management for $2bn
Sold RSA security business unit to Symphony Technology Group for $2bn
Sold Boomi (cloud-native platform) to TPG and Francisco Partners for $4bn
Dell pulled $9bn in cash from spinning off VMware, to buy shareholders out of the tracking stock, in an aggressive deal that first tried to pay shareholders 60 cents on the dollar for their shares, sparking an outcry from activist investors Elliott Management and Carl Icahn, Michael Dell’s old foil. The deal was renegotiated to a fairer $14bn, or 80 cents on the dollar

With a capital allocation framework of 90% free cash flow going towards debt paydown, the divestiture transactions and the VMware spin transaction, the debt balance came down from $57bn to ~$27bn.

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Dell’s Return to Public Markets

As part of this manoeuvre, Michael Dell took his company public under the name Dell Technologies. Under the terms of the deal, Dell will offer either $109-per-share in cash or 1.3665 shares of newly issued Class C stock in Dell Technologies for each share of the tracking stock. The cash portion of the transaction will come from an $11bn special dividend that VMware will issue to all its shareholders — $9bn of which will go to Dell.

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Nominee for the category – “Deal of the Century”

In turn, Dell Technologies, at $75bn, is worth over 4x of what it was before it went private in 2013. Because of all that leverage, Michael Dell, Durban’s Silver Lake and co-investors have done far better, with total gains of more than $40bn, according to Forbes’ calculations. Michael Dell’s net worth has risen to $50bn. In many ways, he was the architect of the biggest buyout coup of all time.

Soon Michael Dell will sit at the helm of two separate public companies: Dell Technologies, his personal computer and IT infrastructure giant, and its spinoff, VMware, a mainstay in cloud-computing infrastructure. Both will hold manageable debt levels and a valuable currency for growth and acquisitions.

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Another Take-Private on the Cards?

Once again, Dell Technologies is at the crossroads of evaluating privatisation. The corporate raider in Michael Dell can once again consider if it might make sense to take advantage of the company’s low market valuation and again retreat from the public market. Michael Dell and Silver Lake together own 58% of Dell and the stock trades for a modest 6-7x current year cash flow.

Michael Dell and Silver Lake would need $17-22bn to buy out the rest of Dell’s shareholders, assuming a premium in the 10% to 40% range (the shares not owned by Michael or Silver Lake are estimated to be worth ~$16bn right now). However, Michael Dell said, “Been there, done that” and dismissed all such speculations.

Another option could be for Dell to effectively take itself private gradually, using free cash flow to buy back stock not owned by Michael Dell or Silver Lake in about three years. However, terms of the VMware spinoff limit the company to buy back its stock to 20%, within the first two years of the transaction (so this approach couldn’t be completed until 2026).

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But there’s no question Dell shares are dirt cheap, trading for about 7x of profits, with an enterprise value to sales multiple of just 0.5x. And the stock has a 2.6% yield.

Dell originally went public in 1988; the company went private in a leveraged buyout in 2013 at $24.9 billion. In 2018, Dell returned to the public markets in a complex transaction in which the company bought out shares of a tracking stock for what was then Dell’s stake in VMware (VMW). Under the current structure, Michael Dell, a trust for his wife Susan Dell, and Silver Lake together have 94% voting power.

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Well, that’s a wrap from the beautiful 2-part case study of Dell.

To recap, the first part was the story of the largest ever leveraged buyout in the tech sector, and also the largest company in terms of revenue to go from public to private until 2013 – it was a $13.65-per-share deal for the world’s third-largest computer maker at the time, and the buyers involved chairman Michael Dell, Silver Lake and Microsoft.

The second part of the story was the largest take-private in the history of buyouts, the largest technology acquisition until 2017, and the largest North American M&A deal in any sector in 2017. It also represented the largest financing commitment for a technology deal until 2017, with up to $50bn in debt — more than 2x as large as any previous deal before 2017.

This also concludes the first case study in the series “Strategic Transformations using M&A.” In the next case study, we will look at AO Smith, which started as an automotive parts and motors company and evolved into the largest manufacturer and marketer of water heaters. Until then, thank you for your time. Please post your feedback and comments.

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Please find below all the information sources that have been instrumental to the above article, along with some additional reading materials. Gratitude to all the creators –

1.????? https://www.forbes.com/sites/antoinegara/2021/08/03/deal-of-the-century-how-michael-dell-turned-his-declining-pc-business-into-40-billion-windfall/?sh=57ef7bcd5c2a

2.????? https://www.forbes.com/sites/ilkerkoksal/2020/01/02/vmware-closes-27-billion-acquisition-of-pivotal-software/?sh=60c83498e6ae

3.????? https://www.forbes.com/sites/jeanbaptiste/2012/12/12/dell-quits-smartphone-business-globally-android/?sh=7bc136db4cce

4.????? https://www.livemint.com/Companies/9JEJmUE6ZeFN5o22KFt5GN/Timeline-Dell-since-1984-a-rollercoaster-ride.html

5.????? https://www.businesswire.com/news/home/20130205006211/en/Dell-Enters-into-Agreement-to-Be-Acquired-by-Michael-Dell-and-Silver-Lake

6.????? https://archive.nytimes.com/dealbook.nytimes.com/2013/02/08/how-dell-tried-to-avoid-potential-buyout-pitfalls/

7.????? https://www.nytimes.com/2018/10/15/business/dealbook/carl-icahn-dell.html

8.????? https://www.forbes.com/sites/connieguglielmo/2013/10/30/you-wont-have-michael-dell-to-kick-around-anymore/?sh=7d7d0d582a9b

9.????? https://www.chegg.com/homework-help/questions-and-answers/founder-dell-computer-michael-dell-featured-forbes-magazine-november-2013-states-carl-icah-q61923001

10.?? https://www.chegg.com/homework-help/questions-and-answers/founder-dell-computer-michael-dell-featured-forbes-magazine-november-2013-states-carl-icah-q61923001

11.?? https://www.forbes.com/sites/ericsavitz/2013/02/05/dell-will-southeastern-asset-back-the-buyout-deal/?sh=102eb50e139d

12.?? https://www.dell.com/learn/pa/en/pacorp1/new-dell