Think Twice

Just Because Dell Can Do an IPO Doesn't Mean It Should

There was a reason it left the public markets the first time. Plus there's all that debt.
Photographer: Justin Sullivan/Getty Images

If you're looking for signs of supreme bullishness in the bull market, may I turn your attention to Dell.

The company now known as Dell Technologies Inc. was created from not one but two leveraged buyouts, the most recent of which closed in September 2016. Now Bloomberg News is reporting that Dell is considering a range of fresh corporate transactions, including a possible initial public offering or perhaps a full purchase of VMware Inc., the business software company that is minority owned by Dell. 

The creation of Dell was a feat of financial engineering, twice. Michael Dell and his private-equity partner, Silver Lake, had a tough time pushing through debt-reliant buyout No. 1, which purchased the computer hardware company from public stockholders in 2013.

Then the team doubled down by purchasing another computer equipment company, EMC, more than a year ago. The result was the creation of a superstore for corporations' technology needs -- one with $50 billion in debt and largely reliant on sales of slow-growing product categories such as computer servers and data storage systems. 

Loaded Up

Dell's net debt of $38 billion is a heavy burden no matter how you calculate annual profits

Sources: Bloomberg data and Dell financial disclosures

Note: Ebitda figures are for the 12 months ended Nov. 3. Dell's adjusted Ebitda excludes items such as stock compensation, purchase accounting adjustments from the EMC acquisition and severance costs. Net debt is short and long term debt excluding cash, cash equivalents and short-term investments.

It’s not clear exactly what Dell is trying to do. The range of reported potential transactions indicate Dell may be trying to figure out the right structure for the company, whether it should stand pat, double down on areas that are working or expand into new ones. I’m going to focus on the cleanest potential transaction, an IPO.

That Dell is considering an IPO for fresh cash may show the company's owners are trying to seize the market opportunity before conditions turn against them. With the current robust debt and equity markets, it's possible for Dell to go public again, but the company brings significant baggage that should and will force investors to think twice.  

The first piece of baggage is the mountain of debt resulting from the two leveraged buyouts. The company's significant borrowings -- nearly $52 billion in short- and long-term debt as of Nov. 3 -- will make it tough for a potentially public Dell to maneuver when companies have to move fast to keep pace with technology changes. 

Here's a glimpse of the level of indebtedness: Using Dell's preferred measure of earnings before interest, taxes, depreciation and amortization, the company's net debt is a significant but not insane 4.8 times the adjusted Ebtida of $7.9 billion in the 12 months ended in early November.

Sure, it's rare for large public corporate technology companies to have such high ratios of debt to profit. IBM and Hewlett Packard Enterprise, for example, have net-debt-to-Ebitda ratios of 2.3 and 1.3, respectively, Bloomberg data show. But Dell's debt-to-profit ratio isn't catastrophic for a company that recently borrowed money for two massive privatizations.

Dell's Ebitda measure, though, excludes a grab bag of items -- including stock compensation, the effect of purchase accounting for the EMC deal, severance costs and more. Without those adjustments and using standard Ebitda calculations, Dell's net debt works out to an eye-watering 9.8 times its trailing 12 month Ebitda. 

If the company does pursue a stock relisting, no doubt investment bankers will come up with still different profit measures to make the debt load look as tolerable as possible. But no matter how financiers slice and dice the numbers, it's hard to ignore that Dell has a lot of debt relative to its profit. 

And Dell's cash flow makes its borrowings look even more burdensome. Operating cash flow was $4.4 billion in the last 12 months, according to data compiled by Bloomberg. That figure included more than $2 billion in interest payments on the company's debt. It asks a lot for that amount of annual cash flow to work down what was $38 billion of net debt as of Nov. 3. 1 There's not much money left over to invest in the business. (Dell has previously said it made significant investments to improve the company.)

Paying the Piper

Dell has generated relatively healthy cash flow even including more than $2 billion in annual interest payments on its debt

Source: Bloomberg

Note: Dell's fiscal year ends in February.

And there's another lingering question about the company's possible IPO: Is this really what Michael Dell wants? The man who founded a computer company in his dorm room 34 years ago has always been a financial pragmatist, but he's also devoted to his company and sometimes irrational about its prospects.

The reason he took his company private in the first place was he believed public stockholders undervalued his company for many years and didn't understand how it was trying to transform itself beyond personal computers. So he forked over billions of dollars of his own money to become the majority owner of a private company, which had the flexibility to get much bigger and more ambitious. Does Michael Dell really want to go back to those public stockholders he shunned? If anything, investors since 2013 have become more skeptical of old-guard technology companies like Dell. 

It makes sense for Michael Dell and Silver Lake to consider capitalizing on a moment when investors are less fearful than at any point in the last decade about companies perched on mountains of debt. I have no doubt the savvy owners and their hired banker help can make an IPO work if that's the path they choose. But given the dual baggage of the company's debt load and Michael Dell's distaste for public market vagaries, the question is whether they should even try. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. Net debt was calculated using Dell's reported short- and long-term debt as of Nov. 3, minus the company's cash, cash equivalents and short-term investments at that point. 

To contact the author of this story:
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net

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