Dell Deal May Herald LBO Rebound That Fuels M&A in 2013
Dell Inc.’s takeover, the largest of a computer maker in a decade, may encourage more private-equity firms to pursue deals, heralding a rebound for mergers and acquisitions after volume shrank last year.
The leveraged buyout by Silver Lake Management LLC and founder Michael Dell would be the biggest since at least 2007, with an enterprise value of about $22 billion, according to data compiled by Bloomberg. The size of the deal probably will amplify potential buyers’ confidence, spurring them to tackle more targets, said Sandler O’Neill & Partners LP’s Devin Ryan.
“LBO activity historically has led the M&A markets more broadly,” said Ryan, an analyst with the New York-based boutique investment bank. “More LBOs generally spark more strategic activity as well -- it all kind of ties into together.”
Dell, also chief executive officer, and Silver Lake announced today that they’re taking the world’s third-largest personal-computer maker private in a deal that values the equity at $24.4 billion, according to a statement. They’re financing the transaction through a combination of cash and debt, including a $2 billion loan from Microsoft Corp. The biggest takeover of a computer maker was Hewlett-Packard Co.’s purchase of Compaq Computer Corp. in 2002 for about $19 billion.
Silver Lake is taking advantage of record-low borrowing costs in the market for junk bonds, where LBOs are financed. Banks arranged $638 billion of leveraged loans last year, compared with $592 billion in 2011, Bloomberg data show. Companies issued $359 billion in U.S. high-yield debt last year, the most in the country’s history.
Debt Markets Open
“The debt markets are wide open,” said Daniel Tiemann, head of transactions and restructuring services in the Americas for KPMG LLP. “It’s like the party’s all set and we’re just waiting for the sellers to show up. Confidence is what is going to make the sellers show up.”
While big LBOs will remain relatively rare, a handful of situations similar to Dell’s are already in the works, said R.J. Hottovy, a senior analyst with Morningstar Inc. (MORN) in Chicago. For example, Best Buy Co. founder Richard Schulze began negotiating last year to take the Richfield, Minnesota-based retailer private. Schulze, like Dell founder Michael Dell, owns part of his takeover target, with a 21 percent stake as of December.
The Dell transaction builds on momentum from the fourth quarter, the only bright spot for M&A last year. While global volume shrank almost 9 percent to $2.2 trillion in 2012, the final three months of the year were the busiest for deals since 2008, with more than $700 billion in transactions, according to data compiled by Bloomberg.
There were more than $400 billion in private-equity deals last year, according to data compiled by Bloomberg, a 21 percent decline from a year earlier and the smallest amount since the depths of the financial crisis. The Dell acquisition dwarfs the LBOs over that period, such as the $7.15 billion takeover of El Paso Corp.’s oil and natural gas exploration business, led by Apollo Global Management LLC. (APO)
While the proposed Dell purchase augurs well for fellow private-equity firms, its success also may embolden strategic buyers, said Matthew Duch, lead portfolio manager at Calvert Investments.
Companies worldwide are sitting on more than $4 trillion in cash, giving them additional ammunition if they hunt for targets. At least one has already begun: John Malone’s Liberty Global Inc. announced plans to acquire Virgin Media Inc. today in a deal valued at about $23.3 billion in cash and stock. U.K. cable operator Virgin Media had a market value of more than $10 billion as of yesterday.
“The Dell deal should push other companies to get off the sidelines and to act,” said Duch, whose Bethesda, Maryland-based firm manages more than $12 billion in assets. “I expect to see more and more deals announced if this one goes through.”
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