Blackstone Withdraws Dell Bid Relieving Pressure to Raise Price
Blackstone Group LP (BX) pulled out of bidding for Dell Inc. (DELL) amid concerns about a worsening global PC slump, taking pressure off Chief Executive Officer Michael Dell to sweeten his original $24.4 billion buyout offer.
A record decline in first-quarter computer sales helped trigger the withdrawal, Blackstone said in a letter released yesterday. The world’s biggest buyout firm made a non-binding offer to acquire Dell last month, challenging plans by founder Dell and Silver Lake Management LLC to take the company private at $13.65 a share.
Blackstone had assembled bankers and buyout engineers, as well as dozens of potential co-investors and consultants since April 8 to grill Round Rock, Texas-based Dell’s executives about divisions and model its prospects, people familiar with the situation said. Blackstone’s exit removes the potential for a bidding war, and it may also jeopardize the original deal by spooking Silver Lake, according to Brian Marshall, an analyst at ISI Group in San Francisco.
“People think the deal is going to fall apart,” said Marshall, who has a neutral rating on Dell. “There’s always ways to get out of a deal if Silver Lake wanted to bail.”
Dell shares declined 3.9 percent to $13.40 at yesterday’s close in New York, 1.8 percent less than the original deal price.
As more consumers check e-mail, browse the Web and watch television and movies on smartphones and tablets, PC shipments plummeted 14 percent in the first quarter, the worst decline since researcher IDC began tracking data in 1994. Blackstone cited “the rapidly eroding financial profile of Dell” and said the market decline in PC volume is “inconsistent with management’s projections for modest industry growth.”
Dell’s operating margin narrowed to 4.88 percent in the fiscal fourth quarter through January, from 5.81 percent in the year-earlier period, data compiled by Bloomberg show. Cash flow from operations fell to $1.44 billion from $1.84 billion a year earlier, the data show. The company reported an 11 percent drop in sales, to $14.3 billion.
“It’s rare for a private-equity firm to drop out unless they’re driven out by a bidding war or they find a monster under the bed when they do due diligence,” said Erik Gordon, a professor at the Ross School of Business at the University of Michigan. “Everybody knew the PC business was falling apart. The only question was how quickly.”
Blackstone’s exit from Dell bidding followed reports that International Business Machines Corp. (IBM) is in talks to sell its low-end server division to Lenovo Group Ltd. (992) Servers have been a bright spot for Dell, posting 18 percent sales growth in the most recent quarter.
“Optically, IBM getting out of servers would present a challenge,” to completing a deal for Dell, Marshall said.
Dave Johnson, one of the Blackstone executives overseeing the firm’s bid, joined the buyout group in January from Dell, where he led mergers and acquisitions for almost four years. Before that, he served a similar role at IBM.
“IBM has made really good strategic decisions in the past about when to exit markets,” said Jayson Noland, an analyst at Robert W. Baird & Co. in San Francisco who has a neutral rating on the shares and a $15 target price. “The chances are fairly high that a deal will get done, but there’s a chance it doesn’t and then the stock could go below $10.”
Unlike Silver Lake, which has a significant Silicon Valley presence with an office in Menlo Park, California, New York- based Blackstone doesn’t have a technology-focused investment record and views the deal as a riskier turnaround project, one of the people familiar with the situation said.
Under terms of its agreement with Dell, Silver Lake agreed it could not back out of its bid. If it tried, Dell could sue and get an injunction forcing Silver Lake to complete the deal. Dell said in a filing yesterday that it continued to support the transaction with Silver Lake and expected the deal to close by the end of the fiscal second quarter, which ends in July.
Blackstone had offered to pay at least $14.25 a share to current investors with an option to hold onto some of their stake through a so-called equity stub. Billionaire Carl Icahn bid $15 a share in cash for as much as 58.1 percent of Dell’s stock. The Dell-Silver Lake deal would be a straight all-cash buyout of the shares Michael Dell doesn’t own for $13.65 a share.
Dell said April 16 that Icahn had agreed not to amass more than a 10 percent stake in the company, or to join with other shareholders to build more than a 15 percent holding. Icahn received U.S. regulatory approval on April 10 to buy as much as 25 percent of Dell’s outstanding shares.
“Blackstone was viewed as a more logical investor to follow through with this deal, so with them gone, the prospect of a bidding war is also gone,” said Rich Kugele, an analyst at Needham & Co. who has a hold rating on the shares.
Michael Dell and Silver Lake’s original bid has been opposed as too low by the company’s largest shareholders including Southeastern Asset Management and T. Rowe Price Group Inc. The computer maker said last month that it got competing offers from Icahn and Blackstone that may be superior.
Representatives for Dell, Silver Lake, and Southeastern declined to comment. Icahn didn’t respond to a request for comment.
“All along I have been saying that it behooves Dell to get this deal done ASAP before more bad PC data causes another reset in the valuation,” said Jim Kelleher, an analyst at Argus Research who recommends selling Dell shares. “Financial buyers, as opposed to strategic buyers, have a return cycle. They don’t have the patience to ride out down cycles.”
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