People with knowledge of that merger proxy
note it will clearly show, not just the blow by blow of the deal
making, but the extreme challenge and unpredictability that Dell is
dealing with as its personal computer business faces increased
competition from tablets and smartphones and PC makers such as
Lenovo, who happily operate on margins of as little as 2 percent.
That volatility is best encapsulated by
one detail expected to be in the proxy. In July, the management plan
presented to the board called for operating income of $5.6 billion in
the current fiscal year 2014. Now, sources say the oft-revised
forecast, which most recently called for $3.7 billion, may be revised
significantly below that.
While Dell has spent over $13 billion on
acquisitions over the last five years designed to move it away from
reliance on PC's, they still represent roughly 66 percent of the
company's $56.9 billion in revenues. Sources familiar with the
situation say the proxy will cite the July plan as evidence of how
fast things have changed.
That three year plan, presented by
management prior to Michael Dell's engagement on a potential deal, was
a bottoms-up view of the business and its prospects that predicted an
increase in revenues and margins in fiscal year 2013—ended this
January—and beyond.
Only three weeks later, that three year
plan proved far too ambitious when Dell badly missed revenue and
earnings per share guidance for its second quarter. It wasn't long
after that, after discussing the idea with his neighbor in Hawaii,
George Roberts of KKR, that Michael Dell approached the company about
the possibility of a management led buyout.
A special committee of directors was
formed to negotiate with Dell and one of its first acts was to try to
get a handle on what the company was really worth. A new financial and
strategic forecast was provided by a small number of finance officials
in September. But as Dell's performance continued to deteriorate
through the fall, even that plan, which called for far lower margins
and revenues than the July plan, but still forecast $4.2 billion in
fiscal year 2014 operating income, seemed optimistic.
People familiar with the matter say the
Special Committee then made the unusual choice of turning to the
consulting firm of BCG to help it understand the future of the PC
business and the prospects for Dell to successfully transform itself.
BCG eventually gave the Special Committee an appraisal that assumed
Dell, even with margin improvement and cost savings, would not
generate operating income above $4 billion for years to come, and
would post roughly $3.4 billion in operating income this fiscal year—a
number that now looks optimistic.
As for the process itself, according to
people familiar with the matter, while Silver lake and KKR were the
first private equity firms to discuss a deal with Michael Dell, who
began this process on August 16, the idea of an LBO was first proposed
to him by Southeastern Asset Management last June, which indicated it
would desire rolling its equity into any transaction.
While KKR initially bid between $12 and
$13 a share, when first indications were received in late October, it
dropped out by early December without a follow up bid. Silver Lake
meanwhile started as low as $11.22 a share before slowly working its
way up to the $13.65 deal price.
None of this is to say the Dell deal will
get done at that price if at all. Shareholders are likely to read
things in the proxy that justify their perspective. And perhaps the
greatest single impediment to the deal is the market itself. As shares
of another troubled computer maker
Hewlett Packard have soared this year and its multiple along with
it, investors have gained confidence that Dell is simply worth more.
Still, the actions of a special committee
trying to navigate not just a typically conflict ridden process, but a
business that continues to change very quickly, and not for the
better, should provide for insight into a deal battle for the ages.
—By CNBC's David Faber; Follow
him on Twitter
@DavidFaber
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