Peak Desperation
When Standard and Poor’s downgraded Dell to junk in September 2013, it cited the slump in the PC business, the pricing pressures in the sector, and the proposed buyout of the company by founder Michael Dell and private equity firm Silver Lake Management. They’d heap new debt on the company whose sales at the time had dropped 8% from a year earlier, and whose net profit had plunged 32%. But at least it still had a profit.
Today the PC industry is still in trouble. HP has been laying off people in big mega-waves, so have Microsoft, Intel, and others.
But OK, instead of investing in cutting-edge products and services that could move the company forward, it’s the perfect time for Dell and its investors to embark on the largest tech deal ever, a masterpiece of financial engineering, the $67 billion buyout of data-storage company EMC.
Standard and Poor’s, which affirmed Dell’s current junk rating of BB+ but put EMC on CreditWatch negative, figured that the deal would be funded through a mix of debt issuance, including perhaps $40 billion in leveraged loans, equity from current owners and the Singaporean wealth fund Temasek, some cash on hand, and the issuance of a flimsy tracking stock – similar to issuing old bicycles – to track VMware’s stock price. Details have not been disclosed.
Wall Street loves it. A whole slew of financial advisors are in on the deal, on both sides. The $40 billion in leveraged loans alone could rake in $500 million in fees, Business Insider reported. Total advisory and financing fees could exceed $700 million. Ka-ching.
And what multiple is Dell paying for EMC? Back in 2013, Michael Dell and his compadres were paying 5 times Ebitda (earnings before interest, taxes, depreciation, and amortization) for Dell.
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