Case Study: Turning a profit into a major windfall

Charles Phiri
Associate: Indalo Business Consulting

In the 1990’s there was a technology boom with entrepreneurs like Steve Jobs and Bill Gates fighting for position to take their places as tech moguls.

The rest is history as they became some of the most successful businessmen in the world. They set the bar for other entrepreneurs like Jeff Bezos and Jack Ma who are modern day tech tycoons.

The biggest innovation at the beginning of the tech age was the invention of the laptop. No longer was it necessary to be confined to a desk to work, you can take your office with you wherever you go. Dell became a major player in this space through some smart business decisions.

Michael Dell’s story is a success story we can all look up to. Especially when we focus on doing better business.

Playing the field
The article points out that Dell has been publicly quiet for most of the past decade, muzzled by fierce takeover negotiations or simply uninterested in the spotlight, or both. His business has done the talking instead. Nine years ago, Silicon Valley and Wall Street alike had written off Dell, the person and the company, both tethered to the then-cratering personal computer market, as en route to the same technological irrelevance as Palm or BlackBerry. Yet even then Dell saw opportunity: He enlisted private equity firm Silver Lake and its billionaire co-head Egon Durban to sidestep the public cynicism, taking his company private for $24.9 billion in 2013, the largest technology leveraged buyout ever. Three years later, he and Durban conjured $67 billion to engineer the acquisition of IT infrastructure giant EMC Corporation. In all, Dell piled an astronomical $70 billion in leverage on his empire, shoveling on debt unlike any thing ever witnessed in corporate America.

The results have been remarkable. Automobiles, telecommunications, energy grids, hospitals and logistics networks have all become digital businesses, producing ever-increasing reams of data that need to be managed and stored. Dell now sits at the helm of the world’s largest infrastructure provider for this activity. “The amount of data being created in the world is just astounding,” he says. “It’s doubling every seven or eight months.”

The article adds that, in turn, Dell Technologies, at $75 billion, is worth more than four times what it was before it went private. Because of all that leverage, Dell, Durban’s Silver Lake and co-investors have done far better, with total gains of more than $40 billion, according to Forbes’ calculations. Dell’s personal net worth has risen to $50 billion. In many ways, he was the architect of the biggest buyout coup of all time.

“It didn’t feel that risky to me,” he says. Skeptics had missed the big picture. Dell gushed cash and sat on plenty of valuable software assets to sell. And cheap money provided the ideal conditions to finance a corporate gut renovation.

“Michael is financially sophisticated. He’s not a technology geek by any stretch of the imagination,” says George Roberts, the billionaire cofounder of private equity giant KKR and a pioneer of the leveraged buyout, who marvels at the deal. “He bought the company back at the right time. With hindsight, his timing looks pretty perfect to me.”

Dell prospered during the rise of the personal computer.
Photo By: XPS via Unsplash

Last man standing
The article adds that, at 56, Dell is technology’s last man standing, the final original founder of the computer era still running his baby. His rivals have aged out or moved on, whether tech billionaires Bill Gates or Larry Ellison or Steve Ballmer, who have shifted course to philanthropy or trophy assets such as Hawaiian islands and NBA teams.

Soon Dell will sit at the helm of two separate public companies: Dell Technologies, his personal computer and IT infrastructure giant, and its spinoff, VMware, a mainstay in cloud-computing infrastructure. Both will hold manageable debt levels and a valuable currency for growth and acquisitions.

“Everybody’s eyes are on Amazon, Microsoft and Google,” says billionaire Marc Benioff, the cofounder of Salesforce and a friend of Dell’s. “They don’t realize that Dell has quietly amassed the market share in enterprise technology.”

The article adds that few entrepreneurs starred as brightly as Michael Dell during the rise of the personal computer. From a University of Texas dorm room in 1983, he created the company that delivered the first PC to millions of Americans, employing the mantra faster, better, cheaper.

Forging a path
The article points out that Dell forged his path using efficiency and deft financial maneuvers, which enabled him to bundle and distribute made-to-order computers at ultralow costs, skills he honed at a young age. At 13, he started his first business from his childhood home in Houston, publishing lists of stamps that he auctioned and shipped by mail, pulling in an impressive $2,000 without big startup costs, to the amazement of his orthodontist father, Alexander, and stockbroker mother, Lorraine. As a teenager, he sold newspaper subscriptions and industriously combed county archives to find the addresses of recently married couples he believed had an inclination to subscribe. At 16, he had saved enough to buy an Apple II, which he took apart to study its mechanics.

Dell capitalized on the personal computer after entering the University of Texas at Austin in 1983 as a premed student. He hawked disk drives and memory chips to burgeoning PC enthusiasts. By January 1984, he discovered that local distributors of IBM computers were being forced to buy too much inventory, so he bought the excess PCs at 10% to 15% discounts and flipped them for a profit. By April, he was generating $80,000 a month and dropped out of college, to the dismay of his parents, particularly his mother.

The article adds that he discovered he could repackage the components of an IBM PC at costs up to 40% lower by managing inventories shrewdly and running a direct-sales model. He would take orders by mail and phone, then assemble the PCs and ship them within one to three weeks, bootstrapping his business with customer orders. In 1986, when he was 21, Dell’s revenue hit $34 million. In June 1988, at age 23, he took his company public and became a multimillionaire, selling $30 million in stock.

He was anointed a technology wunderkind, joining the likes of Steve Jobs and Bill Gates in the original Under 30 club as they collectively took the computer industry mainstream. By 1991, Dell, then 26, was among Forbes’ 400 richest Americans, with a net worth of $300 million. Buyers loved Dell’s customization, service and low costs. In 2000, after a decade of skyrocketing sales, it became the world’s largest seller of personal computers, and Dell’s stake was the foundation of a $16 billion fortune.

Then the empire started to crack, in part due to a race to the bottom in PC margins that Dell himself had kicked off. After retiring in 2004, he returned ahead of the financial crisis to a company in turmoil, stung by an accounting scandal and behind in big trends like laptops. The advent of the iPhone, iPad and low-margin Chromebooks further ate into its prospects, and the market began to treat its server and storage business as obsolete. In response, Dell flailed, wasting $14 billion on acquisitions.

The article points out that by 2012, PC sales were plunging and cloud computing was on the rise. His company was increasingly grouped with corporate dinosaurs like Nokia. He needed to change the equation. Dell began a plot to reassemble his company with new features—like an early Dell PC—and make it valuable once more. “It was an opportunity,” he recalls. “We could make some lemonade out of lemons.”

Michael Dell knew how to take calculated risks
Photo By: Dell Technologies

Dell’s daring deal
The article points out that Michael Dell’s masterstroke was his Denali Holdings’ takeover of EMC, run by CEO Joe Tucci, for $67 billion in 2016. EMC had an 81% stake in VMware. Dell created a “tracking stock” for 53% of VMware (Class V Shareholders), which drew investors Carl Icahn and Paul Singer’s Elliott Management. Dell and Egon Durban’s Silver Lake owned the remaining 28%. VMware acted as collateral for the $50 billion that Dell raised to buy EMC, with financial backing from JPMorgan’s Jimmy Lee and Jamie Dimon.

The napkin deal did more than save money. VMware was the most valuable collateral that JPMorgan and a syndicate of more than 100 banks around the world loaned against. Its value soon soared, rising by $50 billion in the years after Dell’s acquisition, which helped Dell and Durban turn it into an ATM.

In 2018, they pulled $9 billion in cash from VMware to buy shareholders out of the tracking stock in an aggressive deal that first tried to pay shareholders 60 cents on the dollar for their shares, sparking an outcry from activist investors Elliott Management and Carl Icahn, Dell’s old foil, who likened him to Machiavelli and deemed the move “totalitarian.” The deal was renegotiated to a fairer $14 billion, or 80 cents on the dollar. As part of the maneuver, Dell took his company public under the name Dell Technologies.

The article adds that his new namesake didn’t trade well at first. Its share price implied that debt-laden Dell was worth less than zero after accounting for its interest in VMware. He decided the easiest way forward was a full spinoff of VMware, which would please shareholders and make him far richer. As the market absorbed the deal, which is set to close this fall, Dell shares skyrocketed, doubling in value and making Dell $20 billion. As part of the deal, Dell will pull $9 billion more from VMware to pay down its buyout debt, retiring billions of dollars in loans secured by everything it owns.

“To his enormous credit, he did the right thing,” says Jesse Cohn, partner at Dell shareholder Elliott Management. “He split a good blackjack hand.”

Master of its own destiny
The article points out that Dell is master of his own destiny. Before the LBO, he owned 15.6% of his company, shares worth less than $4 billion. Thanks to the miracles of his financial engineering, he will own 52% of Dell and a 42% stake in VMware. The total value of his Dell holdings is $40 billion.

“It is incredible how much of the company Michael now owns,” says a fawning Marc Benioff. “There really isn’t an entrepreneurial success story of this magnitude that I can think of.”

Tenacity is often something that we aspire to embrace because it means that we care enough to do whatever it takes for our businesses to succeed. From the standpoint of a distressed business, this is one virtue BRPs need to encourage their clients to have.

Charles Phiri is an associate at Indalo Business Consulting