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    Dell

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    Juhi
    Dell, Inc. was taken private in a $24.9 billion management buyout led by founder and CEO Michael Dell in October 2013. Shareholders had opposed the buyout since it was announced in February 2013, accusing Michael Dell of undervaluing the company. The buyout was evaluated based on projections of $3.3 billion in potential cost savings Dell could achieve by going private. Consulting firm Boston Consulting Group analyzed scenarios for realizing 25% or 75% of these savings. Investment bank J.P. Morgan then calculated what price a buyer would need to pay to achieve various returns, ranging from $12.23 to $17.08 per share depending on the cost savings scenario and targeted return. This analysis was used

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    Dell

    Uploaded by

    Juhi
    69 views2 pages
    Dell, Inc. was taken private in a $24.9 billion management buyout led by founder and CEO Michael Dell in October 2013. Shareholders had opposed the buyout since it was announced in February 2013, accusing Michael Dell of undervaluing the company. The buyout was evaluated based on projections of $3.3 billion in potential cost savings Dell could achieve by going private. Consulting firm Boston Consulting Group analyzed scenarios for realizing 25% or 75% of these savings. Investment bank J.P. Morgan then calculated what price a buyer would need to pay to achieve various returns, ranging from $12.23 to $17.08 per share depending on the cost savings scenario and targeted return. This analysis was used

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    Dell, Inc. was taken private in a $24.9 billion management buyout led by founder and CEO Michael Dell in October 2013. Shareholders had opposed the buyout since it was announced in February 2013, accusing Michael Dell of undervaluing the company. The buyout was evaluated based on projections of $3.3 billion in potential cost savings Dell could achieve by going private. Consulting firm Boston Consulting Group analyzed scenarios for realizing 25% or 75% of these savings. Investment bank J.P. Morgan then calculated what price a buyer would need to pay to achieve various returns, ranging from $12.23 to $17.08 per share depending on the cost savings scenario and targeted return. This analysis was used

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    69 views2 pages

    Dell

    Uploaded by

    Juhi
    Dell, Inc. was taken private in a $24.9 billion management buyout led by founder and CEO Michael Dell in October 2013. Shareholders had opposed the buyout since it was announced in February 2013, accusing Michael Dell of undervaluing the company. The buyout was evaluated based on projections of $3.3 billion in potential cost savings Dell could achieve by going private. Consulting firm Boston Consulting Group analyzed scenarios for realizing 25% or 75% of these savings. Investment bank J.P. Morgan then calculated what price a buyer would need to pay to achieve various returns, ranging from $12.23 to $17.08 per share depending on the cost savings scenario and targeted return. This analysis was used

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    Dell, Inc.

    On September 13, 2013, one of the most iconic technology companies, Dell Computer,
    was taken private through a management buyout – a buyout undertaken by current
    management. In this case, the founder and CEO of Dell, Michael Dell, was working with
    the private equity firm Silver Lake, to purchase Dell.

    Since the February, 2013 announcement of the transaction, shareholders had been
    fighting the buyout. Accusations were levied against Michael Dell for his role in the
    process, and ultimately, the case went to court for resolution.  We’re going to walk
    through the conditions that led to the management buyout, the bidding process, and the
    subsequent court case that attempted to determine an accurate valuation for Dell. 

    As you can see from this stock price chart, Dell had been struggling since early 2012.
    Michael Dell felt that taking the company private would give him the freedom to enact
    cost-saving measures, away from the impatient and unconvinced capital markets.  On
    August 14, 2012, Mr. Dell decided to pursue taking Dell private and met with the Dell
    Board of Directors to discuss this possibility and create a committee to discuss any
    proposals.

    To consider the buyout, Dell’s Board needed two things: they needed a sense of the
    value of the cost-saving measures Mr. Dell was proposing, and they needed to know
    how private equity firms would value the company, to set prices at which they would
    consider bids.

    Dell management had identified $3.3 billion in potential cost savings.  At the request of
    the Dell Board, on January 3, 2013, the Boston Consulting Group (BCG) created three
    scenarios around those potential cost savings:
     A Base Case, where none of the savings were realized
     The BCG 25% Case, where 25% of the savings were realized
     The BCG 75% Case, where 75% of the savings were realized

    BCG believed that the BCG 25% Case was attainable but doubted that the 75% was
    very likely, as it would require Dell to achieve margins higher than they or any of their
    competitors had ever achieved.

    That provided the Dell Board with a sense of the cash flows. Next, they needed an idea
    of how private equity firms would value and bid on Dell.

    The assumption was that Dell would be held private for 4.5 years before a public offering
    was held to return the shares to the public.  Using the scenarios to determine the
    amount of cost savings, along with other forecasted assumptions, a future price of the
    stock in 4.5-years’ time was determined: $32.49, $35.24, and $40.65, depending on the
    cost saving scenario.

    With these scenarios and future prices in hand, J.P. Morgan, on behalf of the Dell Board
    of Directors, attempted to work out a price that an acquirer would pay for the company.
    For private equity, it is not unusual to “work backwards” – determine the future price you
    expect to sell the company for, determine the rate of return you would like to earn, then
    discount the price back at that rate of return to determine the price you would pay today.
    The following chart summarizes the stock prices an acquirer would pay to achieve a
    20%, 25%, or 30% IRR, assuming the three scenarios and future stock prices:

      BCG Base Case BCG 25% Case BCG 75% Case


    20% IRR $13.23 $14.52 $17.08
    25% IRR $12.67 $13.75 $15.88
    30% IRR $12.23 $13.13 $14.92

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