Dell’s Talks Said to Break Up a Few Times Over Pricing

Last August Michael Dell approached the board of the computer company he had founded in 1984. He had a proposition: He wanted to take Dell Inc. private and told the board he was the right person to do so, according to people familiar with the matter.

Soon after, serious talks began, moving from Round Rock, Texas, where Dell is based, to California to New York. The code name for the potential deal: Mr. Denali. The discussions broke up several times over price, especially in the final weeks of the deal, according to the people. The price ranged from an initial offer of $12 a share to the final price of $13.65.

After six months of negotiations, Dell and private-equity firm Silver Lake Management LLC agreed yesterday to buy the computer company for $24.4 billion in the biggest leveraged buyout since 2007. While other leveraged buyouts are often initiated by LBO firms, this was Michael Dell’s deal from the start, an effort to ensure his legacy and reinvent the struggling company he founded in a University of Texas dormitory almost three decades ago.

Michael Dell is committed to his job as chairman and chief executive officer, said Dell Chief Financial Officer Brian Gladden.

“Financially, he’s putting a lot of capital into this process,” Gladden said.

Dell advanced 0.1 percent to $13.43 at 10:45 a.m. in New York trading. In the last 52 weeks the stock traded between $8.69 and $18.36, data compiled by Bloomberg show.

Under the deal, Dell will contribute his 14 percent stake, valued at about $3.4 billion, as well as $700 million, a person familiar with the matter said, giving him a majority stake in the company. Silver Lake will invest about $1.4 billion in the buyout and Microsoft Corp. will invest about $2 billion, one of the people said. Another $13 billion will be financed by banks.

Industry Shift

Going private will enable CEO Dell, 47, to reposition the company amid shrinking personal computer sales and the industry’s shift to mobile and cloud computing without the scrutiny and stock fluctuations that come with being publicly traded.

The deal took several twists as board members tried to ensure that shareholders were protected in a buyout that was being led by management. Dell recused himself from the board to let it work independently on the potential deal, according to people familiar with the situation.

Alex Mandl, the board’s lead director, formed a special committee with three directors, Laura Conigliaro, Ken Duberstein and Janet Clark. The committee hired as financial advisers three of JPMorgan Chase & Co.’s top dealmakers -- James B. Lee, vice chairman, Jim Woolery, co-head of North America M&A, and Kurt Simon, head of technology, media & telecommunications. Goldman Sachs Group Inc. also advised Dell.

‘Independent’ Bank

JPMorgan didn’t advise Dell on any of its recent deals, according to data compiled by Bloomberg, avoiding a potential conflict of interest with management.

“The independent directors will usually pick a bank that is independent, which means it didn’t have a great deal of contact with the management that is participating in the buyout,” Mort Pierce, partner in the M&A group of law firm White & Case LLP in New York.

Jennifer Zuccarelli, a spokeswoman for JPMorgan, and David Frink, a spokesman for Dell, declined to comment.

One of the first moves by the board was to make Dell agree he would work with any and all potential partners, said one of these people. Whether it was Silver Lake or TPG Capital or another private-equity firm, Michael Dell would have to negotiate with them in good faith if they made the best offer, said this person.

Possible Alternatives

Meanwhile, the board had hired Boston Consulting Group Inc. to consider alternatives, according to people familiar with the matter. One idea discussed by BCG and Dell executives: Break the company in two, splitting off the personal computer business from units that focused on data-center hardware and software, the people said.

The board and advisers at JPMorgan also explored a dividend recapitalization as a way to boost shareholder value. The board decided a buyout of the entire company was the best deal for investors, said the people.

The special committee later invited Silver Lake to join the buyout talks, said the people. Silver Lake, the world’s largest private equity fund focused on technology investment, was a natural candidate to be Dell’s financial partner.

Egon Durban, a managing partner at Menlo Park, California- based Silver Lake who led the deal, is a neighbor of Michael Dell’s in Hawaii, and Dell was an early investor in Silver Lake. A spokesman for Silver Lake declined to comment.

The special committee and its advisers also invited other funds, such as TPG and KKR & Co., which later dropped out of the talks, according to the same people.

Microsoft Ties

There was also a tie between Durban and Microsoft. Durban, who joined Silver Lake in 1999, had led the firm’s buyout of Skype Technologies SA, which Microsoft later bought. Microsoft joined the Dell talks and agreed to contribute a $2 billion loan to help finance the deal.

That loan was discussed by Dell and Microsoft CEO Steve Ballmer, according to two people familiar with the negotiations. The loan is intended to bolster one of the largest makers of computers using Windows software.

Microsoft opted for a loan rather than an equity investment to avoid rankling other PC that use Windows, said one of the people, who asked not to be named because the matter isn’t public.

With the financing lined up, the two sides were still debating price as recently as last week, said a person familiar with the matter.

Price Talk

When Bloomberg News broke news of Dell going private on Jan. 14, the parties were considering a deal priced at around $12 to $12.50 a share, said one person. Dell shares, which traded around $10.99 at the time of the story, jumped 18 percent to $12.83 that day, before closing at $12.29. The final price was $13.65, representing a 25 percent premium to Dell’s closing price Jan. 11, the last trading day before the talks were reported.

Dell’s board and Silver Lake also battled over restrictions Dell wanted to place on the firm, such as a larger-than-normal fee of $750 million if Silver Lake tried to back out and the ability to sue Silver Lake to follow through on the deal if it got cold feet, said one of these people.

Dell’s board and its advisers also wanted to limit the ability of Silver Lake to match any new bid to just once, said these people. The restrictions, intended to protect shareholder interests, were later included in the deal’s terms, according to people familiar with the matter.

Evercore Partners Inc., which is advising the special committee, has 45 days to seek higher bids, known as a go-shop period. The task might be impossible, said Pierce of White & Case.

“Go-shops are very infrequently successful because other private equity firms are reluctant to compete against each other,” he said.

To contact the reporter on this story: Serena Saitto in New York at ssaitto@bloomberg.net.

To contact the editor responsible for this story: Jeffrey McCracken in New York at jmccracken3@bloomberg.net

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