Dell Technologies Inc., the biggest private tech company in the world, announced Tuesday that it would return to public trading five years after its leveraged buyout.
The buyout—which was one of the largest leveraged buyouts in tech history—marked the end of the company’s storied history as a provider of PCs.
Going back to the “dude, you’re getting a Dell” commercials, Dell was a once dominant player and was a stock darling in the late 1990s. However, the company lost its edge as the world shifted to laptops, and mobile phones, and complex operations were shifted to cloud services like Amazon Web Service or Google Cloud. Dell then found itself in a new complex environment where it needed to make a significant transition in its business to survive beyond the era of PCs.
In 2013, Michael Dell said that taking his namesake company private would allow him the freedom to prepare the company for a future beyond personal computers. And indeed, the company is re-emerging now as a more diversified leader in computer equipment and software.
Now the tech giant will buy out its tracking stock, DVMT, in a cash and share-swap deal valued north of $21 billion. Worth roughly $17 billion as of Friday, the shares were originally created to mirror the value of software maker VMware Inc. (NYSE: VMW), which Dell has a controlling stake in.
The tracking stock was put in place in 2016 to help finance Dell’s $67 billion acquisition of data storage company EMC Corp., which at the time was the largest technology takeover ever and tripled Dell’s debt load. The EMC deal was primarily cash, with the rest paid through the tracking stock which was linked to a portion of EMC’s controlling stake in VMware. The DVMT tracking stock and the rest of VMware are both publicly traded.
VMware will also pay its shareholders an $11 billion special dividend as part of the deal, and Dell will offer additional shares and cash to make up the difference. Dell Technologies Class C common stock will then be publicly listed on the NYSE.
The deal may give Dell more direct control over VMware, 80% of which is now controlled by holders of the Dell tracking stock and the company’s DHI shareholders – Michael Dell and investment firm Silver Lake. It will also simplify the stock structure of Dell and its publicly traded subsidiary.
This move allows the company to bypass the IPO process, and the period of time before an IPO where potential investors scrutinize the business – in Dell’s case, a business that has taken on a substantial debt load.
But there’s a twist. The special shares held by Michael Dell and Silver Lake will give them more votes than all other investors, putting them firmly in control of the business and rendering shareholders’ votes largely useless.
Here’s why that might be a problem.
Shareholders of the new Dell stock will be investing in a hugely different company than the one that delisted in 2013, and will have much less voting power than they once did.
Michael Dell now owns 72% of the company’s common shares. After the deal is complete, he will continue on as chairman and CEO, and will control upwards of 54% of the company – with Silver Lake controlling another 16 – 18%. This will put Dell the man in a situation much like Facebook’s Mark Zuckerberg or Snap’s Evan Spiegel, where he cannot be dislodged from his position and will enjoy inviolable control over the company.
In the last several years, Dell has certainly diversified into faster growing segments of the technology market becoming a bundle of hardware and software companies:
Dell claims that customers are better off with this combination, stating that “Individually and together, we enable true digital transformation and deliver game-changing advantages.”
But the company has yet to figure out how to profit on holding these companies together. When it went private in 2013, Dell’s financial performance was terrible. Then in 2015 when it announced the deal for EMC, the company lost $768 million on sales.
And the company is still losing piles of money. According to a July 2 SEC filling, “Over the trailing twelve-month period Dell generated $82.4 billion of revenue with a net loss of $2.3 billion and cash flow from operations of $7.7 billion.”
To acquire EMC, Dell took $49 billion in debt. The company claims to have paid down $11 billion of “gross debt since its merger with EMC in September 2016,” which puts the company’s debt pile at $38 billion. One concern now is, with interest rates rising, if Dell will soon find it more difficult to cover its interest payments.
Another issue is that this new deal could harm VMware, the crown jewel in Dell’s portfolio of businesses.
Currently, VMware is doing well and is expected to generate $2.15 billion in revenue in the second quarter. Dell says that VMware generated “$400 million in growth synergies in FY18 related to its affiliation with Dell Technologies, and in FY19 is on track to achieve $700 million faster than initially expected.”
The deal will do some damage to VMware’s cash position. Shebly Seyrafi, an analyst at FBN Securities, says that the deal will leave VMware with $1.63 billion in gross cash, while net cash will go from $8.34 billion to a deficit of $2.6 billion.
Perhaps the biggest question about this deal is what, if any, are the immediate benefits of such a transaction?
When asked in an interview with CNBC, Michael Dell’s answer was “Well uh look I think aaahhh… it was the best option to simplify the capital structure.”
When asked why it’s worth going public if the only discernible outcome is a better capital structure, Michael Dell’s answer was that “it’s a bit too complicated” to explain, which certainly leaves something to be desired.
In a conference call for investors, CFO Tom Sweet shed a bit more light saying “The transaction also enables strategic and financial flexibility for future initiatives,” which seems like the plan is to ensure that Dell Technologies will be able to do whatever it takes to fund future ventures to advance its mission.
Such vague answers may be wearying for investors who’ve stuck with Dell through going private in 2013, the acquisition of EMC in 2016, and this new reorganization. And for a while, investors shouldn’t expect much better answers from Michael Dell than “Well uh look I think aaahhh…”
It may be wise in this case to hold off on buying the new Dell Technologies Class C shares until it becomes clearer how this move will benefit the conglomerate, how Dell will handle its debt going forward, and if the company will be able to stem its cash losses.