Dell’s Leveraged Buyout: A Real-life Case Study
Acquisitions
Acquisitions or takeovers are a transaction or process wherein one company (commonly called as acquirer) or an investor acquires another company (known as target). Acquisition can be done in a number of ways that can range from one firm merging with another firm to create a new firm or managers of a firm acquiring the firm from its stockholders and creating a private firm.
Briefly the transactions can be classified as follows:
If a firm is acquired by another firm, the various distinctions are:
- Merger: Target firm becomes part of acquiring firm; stockholder approval is needed from both firms
- Consolidation: Target firm and acquiring firm become new firm; stockholder approval needed from both firms
- Tender offer: Target firm continues to exist, as long as there are dissident stockholders holding out. Successful tender offers ultimately become mergers. No shareholder approval is needed
- Acquisition of assets: Target firm remains as a shell company, but its assets are transferred to the acquiring firm. Ultimately, target firm is liquidated.
If the company is acquired by its own manager or/and outside investors
- Buyout: Target firm continues to exist, but as a private business. It is usually accomplished with a tender offer.
Here, we will discuss Buyout only with particular reference to the Leveraged Buyout case of DELL which is in the news nowadays.
Leveraged Buy Out (LBO)
Any type of acquisition aims at creating synergy by acquisitions or takeover of another company. Some companies use these transactions to create strategic synergies wherein the acquirer target the companies in same sector and thus profit by increasing economies of scale and capturing market share and expertise of target company. This type of buyer is a strategic buyer and finances the purchase through company cash, company stock as well as some percentage of debt.
On the other hand LBO is the purchase or the acquisition of the company using significant amount of debt and some amount of sponsor’s equity. Ratio of Debt to Equity is generally 70 to 30.
LBO is often undertaken by financial buyers or investors who seek to generate high returns on the equity and increase their potential returns by using financial leverage (debt) and implementation of cost cutting strategies in operations of the company.
Acquisition of HCA Inc. in 2006 by Kohlberg Kravis Roberts & Co. (KKR), Bain & Co., and Merrill Lynch is the largest LBO transaction in recent times. The three companies paid around $33 billion for the acquisition.
While looking for a company for a leveraged buyout, an acquirer looks for company which:
- Has very little or no debt on its balance sheet
- Is a non-cyclical and mature company with a well established brand, products, and industry position
- Is Undervalued
- Has a strong management team
- Has non-core assets which can be liquidated to generate cash flows
- Has an operating cash flow which is predictable and strong enough to service the debt raised for LBO
- Has limited Working capital requirements
- Has a viable exit strategy.
It is essential for an acquirer to perform a detailed analysis while determining the Purchase value to be paid for buying out a company.
- Most important parameters in the valuation of a company are EBITDA and Free Cash Flow (FCF). Projections for these two have to be drawn out for the investment horizon (typically 3 to 7 years)
- Exit Multiple: Valuation Multiples such as EV/EBIDTA and EV/FCF are used to determine the value of the company at time of acquisition. An acquirer aims at multiples which are similar or higher at the time of exit then at the time of acquisition
- Key Leverage levels and Capital structure (senior and subordinated debt, mezzanine financing, etc.) which has to be managed for the achievement of required results
- Determining equity returns (IRRs) to the financial sponsor and performing sensitivity analysis of the results across range of leverage and exit multiples, as well as investment horizons
- Reaching a value which can be paid to acquire the company.
For a successful LBO generating positive returns, three factors are most essential:
- De-levering (paying down debt): Company is generating cash flow sufficient to pay off the debt raised to buy it
- Operational improvement (e.g. margin expansion, revenue growth): Cost cutting measures and sale of non-core assets result in lean structure thereby generating higher profits
- Multiple expansions (buying low and selling high): EV/EBIDTA increasing or remaining similar.
Risks in LBOs for Equity and Debt Holders
Along with operating risk, there is risk associated with financial leverage. High Interest costs which are also fixed costs are a huge burden on company. It is a risk for both debt as well as equity holders. Small changes in the enterprise value (EV) of a company can have a significant effect on the equity value since the company is highly levered and the value of the debt remains constant.
Exiting from a LBO
Financial buyers can use many exit strategies to realize the profits made on their investments. A financial buyer typically expects to realize a return on its LBO investment within 3 to 7 years via one of these strategies.
- Outright sale of the company to a strategic buyer or another financial sponsor
- IPO: Initial Public offering , that is, issuing new equity to the public
- Recapitalization: By paying off the debt over the time thereby converting debt into Equity and optimizing capital structure of the company.
LBO of DELL
Let us have a look at the LBO of computer manufacturer DELL Inc. (DELL.O) which was completed in October 2013.
On September 12, 2013, the buyout by founder and CEO Michael DELL and private equity firm Silver Lake Partners of DELL for $25 billion had been approved by DELL stockholders. The merger transaction closed on October 29, 2013, and the delisting from NASDAQ Stock Market commenced. DELL shareholders received $13.75 in cash, in addition to a special dividend of $0.13 per common share.
LBO of DELL faced stiff opposition from minority stake controllers Southeastern Asset Management, second largest shareholder after Mr. DELL and T. Rowe Price, third largest holder. As per an analysis by Southeastern Asset Management, share price of DELL was determined at $23.72 per share.
Go Shop period
It allows DELL to solicit alternative takeover proposals for 45 days. It is an exercise to promote level playing field. Blackstone and Carl Icahn emerged as the two interested parties offering $14.25 per share and $15 per share.
Offer was withdrawn due to DELL’s deteriorating business.
Financing the LBO
A debt of $7.5 billion has been issued which is the second-largest institutional LBO loan this year, behind Heinz’s $9.5 billion institutional issuance for Heinz’s $28 billion buyout by Berkshire Hathaway and 3G Capital.
- DELL has proposed to raise the first-lien secured debt totaling $7.5 billion and the company has proposed $1.25 billion second-lien notes due in 2021.
- Once the deal closes, DELL will have a debt load of about $18 billion, including a $2 billion loan provided by Microsoft Corp. (MSFT), up from $6.8 billion in debt before the LBO, according to data compiled by Bloomberg.
It will take DELL at least three years to repay its debt if it continues to generate cash flow of $2 billi4on to $3 billion a year. Also, reduction of workforce by a number 108,800 is also in the pipeline in order to make DELL more efficient.
- The business of laptops and workstations is decreasing and thus there is an immediate requirement for DELL to grow by acquisitions in upcoming technologies such as Tablets and Pads.
- The company has a strong brand name, broad customer base and good market position.
The deal is expected to close before the end of the second quarter of DELL’s fiscal 2014 year.
Leveraged Buyout has emerged as most preferred way to acquire in recent times. DELL’s CEO and co-founder Michael DELL believes that as a private entity DELL has conquered horizons and will continue to do so. He quotes that:
DELL has made solid progress executing this strategy over the past four years, but we recognize that it will still take more time, investment and patience, and I believe our efforts will be better supported by partnering with Silver Lake in our shared vision. I am committed to this journey and I have put a substantial amount of my own capital at risk together with Silver Lake, a world-class investor with an outstanding reputation. We are committed to delivering an unmatched customer experience and excited to pursue the path ahead
If you have any comments, questions or queries, post them below!
MAKE YOUR CAREER IN
Need more Info?
Tags
- ABOUT CFA COURSE
- ABOUT FRM COURSE IN INDIA
- ABOUT THE US CPA COURSE
- ACCA
- ACCA CERTIFICATION
- ACCA COURSE
- ACCA COURSE DETAILS
- ACCA COURSE DURATION
- ACCA COURSE ELIGIBILITY
- ACCA COURSE ELIGIBILITY CRITERIA
- ACCA COURSE ELIGIBILITY IN INDIA
- ACCA COURSE FEES
- ACCA COURSE FEES IN INDIA
- ACCA COURSE IN INDIA
- ACCA COURSE STRUCTURE
- ACCA COURSE STRUCTURE AND FEES IN INDIA
- ACCA COURSE SUBJECTS
- ACCA COURSE SYLLABUS
- ACCA EXAM STRUCTURE AND PATTERN
- ADMISSION TO CFA
- AI-POWERED FRAUD DETECTION IN ACCOUNTING
- APPLICATIONS OF AI IN ACCOUNTING
- AUDITING AND COMPLIANCE
- AUTOMATED DATA ENTRY
- AUTOMATED DATA ENTRY AND PROCESSING
- BAT COURSE
- BEST FINANCIAL MODELING COURSE
- BEST FINANCIAL MODELING COURSE IN INDIA
- BEST ONLINE CFA PREP COURSE
- BEST ONLINE FINANCIAL MODELING COURSE
- CAREER OPPORTUNITIES FOR CPA
- CERTIFICATION
- CERTIFIED FINANCIAL PLANNER (CFP®) COURSE
- CERTIFIED FINANCIAL PLANNER®
- CERTIFIED FINANCIAL PLANNER® PROGRAM
- CFA
- CFA CERTIFICATION
- CFA COURSE
- CFA COURSE CURRICULUM
- CFA COURSE DETAILS
- CFA COURSE DURATION
- CFA COURSE FEES
- CFA COURSE FEES IN INDIA
- CFA COURSE FULL DETAILS
- CFA COURSE IN INDIA
- CFA COURSE IN INDIA CFA COURSE CFA COURSE DETAILS CFA COURSE SUBJECTS
- CFA COURSE SUBJECTS
- CFA COURSE SYLLABUS
- CFA COURSE TRAINING
- CFA CURRICULUM
- CFA FOUNDATION COURSE
- CFP CERTIFICATION
- CFP COURSE
- CFP COURSE DETAILS
- CFP COURSE FEE
- CFP COURSE FEES IN INDIA
- CFP EXAM
- CFP® COURSE FEES
- CFP® COURSE SYLLABUS
- CFP® ELIGIBILITY
- CMA COURSE
- CMA COURSE DETAILS
- CMA COURSE DETAILS IN INDIA
- CMA COURSE DURATION.
- CMA COURSE ELIGIBILITY
- CMA COURSE ELIGIBILTY
- CMA COURSE FEES
- CMA COURSE FULL DETAILS
- CMA COURSE IN BANGALORE
- CMA COURSE IN INDIA
- CMA COURSE SUBJECTS
- CMA COURSE SYLLABUS
- CMA ONLINE COURSE
- CPA ACCOUNTANT
- CPA COURSE
- CPA COURSE DETAILS
- CPA COURSE DURATION
- CPA COURSE ELIGIBILITY
- CPA COURSE FEES
- CPA COURSE FEES IN INDIA
- CPA COURSE IN INDIA
- CPA COURSE STRUCTURE
- CPA COURSE SYLLABUS
- CPA EXAM
- EVOLUTION OF AI IN ACCOUNTING
- EVOLUTION OF AI IN FINANCE
- FINANCIAL MODELING
- FINANCIAL MODELING AND VALUATION
- FINANCIAL MODELING AND VALUATION COURSE
- FINANCIAL MODELING COURSE
- FINANCIAL MODELING COURSE CURRICULUM
- FINANCIAL MODELING COURSE DETAILS
- FINANCIAL MODELING COURSE FEE
- FINANCIAL MODELING COURSE IN INDIA
- FINANCIAL MODELING COURSE USEFUL
- FINANCIAL MODELING COURSE WITH PLACEMENT
- FINANCIAL MODELLING COURSE
- FINANCIAL MODELLING COURSE DURATION
- FINANCIAL MODELLING COURSE FEES
- FINANCIAL MODELLING COURSE ONLINE
- FINANCIAL RISK MANAGER
- FM COURSE & FRM® COURSE
- FRM
- FRM COURSE
- FRM COURSE CERTIFICATION
- FRM COURSE CURRICULUM
- FRM COURSE DETAILS
- FRM COURSE DURATION
- FRM COURSE ELIGIBILITY
- FRM COURSE FEES
- FRM COURSE IN INDIA
- FRM COURSE SYLLABUS
- FRM® COURSE SUBJECTS
- FRM® COURSE SYLLABUS & HOW TO APPLY FOR FRM® COURSE
- IN FINANCE
- PG PROGRAM IN BUSINESS ACCOUNTING & TAXATION
- PGP BAT COURSE FEES
- PGP BAT COURSE SALARY IN INDIA
- PGP-BAT COURSE
- PGP-BAT COURSE COURSE IN INDIA
- PGP-BAT COURSE DETAILS
- PGP-BAT COURSE DURATION
- PGP-BAT COURSE ELIGIBILITY
- PGP-BAT COURSE FULL FORM
- PGP-BAT COURSE IN INDIA
- PGP-BAT COURSE INSTITUTE IN INDIA
- PGP-BAT COURSE SYLLABUS
- PLACEMENTS TO CFA
- SOFT SKILLS
- TAX PREPARATION
- TAX PREPARATION AND PLANNING
- US CMA COURSE
- US CMA COURSE DETAILS
- US CMA PREPARATION
- US CPA COURSE
- US CPA COURSE DETAILS
- US CPA COURSE FEES
- US CPA COURSE FULL FORM
- US CPA COURSE TRAINING
- US CPA EXAMS
- US CPA MEANING
- US-CMA
- US-CPA
- WHAT IS ACCA COURSE
- WHAT IS CFP® CERTIFICATION?
- WHAT IS CMA COURSE
- WHAT IS CPA COURSE
- WHAT IS FINANCIAL MODELING ALL ABOUT
- WHAT IS FINANCIAL MODELING COURSE
- WHAT IS FRM® COURSE? FRM® COURSE DETAILS
- WHAT IS FRM® COURSE? FRM® COURSE REVIEW
- WHAT IS THE CPA COURSE
- WHAT IS US CPA COURSE?
- WHAT IS US-CMA COURSE
Leave a Reply