Blackstone Group LP pulled out of bidding for Dell Inc. amid concerns about the personal-computer maker’s finances and the worsening outlook for global PC sales.
In a letter to Dell’s board, Blackstone cited an “unprecedented” 14 percent market decline in PC volume in the first quarter, according to a statement today. The world’s biggest buyout firm made a non-binding offer to acquire Dell last month, rivaling a $24.4 billion joint bid by founder Michael Dell and Silver Lake Management LLC, the largest proposed leveraged buyout since the financial crisis.
Blackstone’s enthusiasm for the transaction waned as global PC sales fell the most on record last quarter. Blackstone had assembled bankers and buyout engineers, as well as dozens of potential co-investors and consultants, near Austin, Texas, since April 8 to grill Round Rock, Texas-based Dell’s executives about divisions and model its prospects, people familiar with the situation said yesterday.
“Blackstone was viewed as a more logical investor to follow through with this deal, so with them gone, the prospects of a bidding war is also gone,” said Rich Kugele, an analyst at Needham & Co.
Dell shares declined 3.2 percent to $13.50 at 9:46 a.m. in New York. Earlier, they touched $13.40, 1.8 percent less than the original $13.65-a-share buyout offer.
“It’s rare for a private equity firm to drop out unless they’re driven out by a bidding war or they find a monster under the bed when they do due diligence,” said Erik Gordon, a professor at the Ross School of Business at the University of Michigan. “Everybody knew the PC business was falling apart. The only question was how quickly.”
Blackstone today cited “the rapidly eroding financial profile of Dell” and said the market decline in PC volume is “inconsistent with management’s projections for modest industry growth.”
Dell’s operating margin narrowed to 4.88 percent in the fiscal fourth quarter through January, from 5.81 percent in the year-earlier period, data compiled by Bloomberg show. Cash flow from operations fell to $1.44 billion from $1.84 billion a year earlier, the data show. The company reported an 11 percent drop in sales, to $14.3 billion.
“Dell is facing downward price pressure on PCs, shrinking margins, and lower cash flow, and that’s the last thing you want in a leveraged buyout,” said Alberto Moel, a technology analyst at Sanford C. Bernstein & Co. in Hong Kong. “You take a company private because you think you can do better; that you have some unidentified growth opportunity, or else ways to cut costs and improve margins. Dell has neither.”
Unlike Silver Lake, which has a significant Silicon Valley presence with an office in Menlo Park, California, New York- based Blackstone doesn’t have a technology-focused investment record and views the deal as a riskier turnaround project, one of the people familiar with the situation said.
Under terms of its agreement with Dell, Silver Lake agreed it could not back out of its bid. If it tried, Dell could sue and get an injunction forcing Silver Lake to complete the deal. A Silver Lake spokesman declined to comment. Dell spokesman David Frink declined to comment.
PC sales are plummeting as buyers opt for smartphones and tablet computers while Microsoft Corp.’s newest operating system met with lackluster demand, researcher IDC said April 10. Global PC unit shipments fell to 76.3 million, worse than the 7.7 percent decline IDC had forecast, the market researcher said in a statement. The quarterly slump was the steepest since IDC began tracking shipments in 1994.
Blackstone had offered to pay at least $14.25 a share to current investors with an option to hold onto some of their stake through a so-called equity stub. Billionaire Carl Icahn bid $15 a share in cash for as much as 58.1 percent of Dell’s stock. The Dell-Silver Lake deal would be a straight all-cash buyout of the shares Michael Dell doesn’t own for $13.65 a share.
Dell said April 16 that Icahn had agreed not to amass more than a 10 percent stake in the company, or to join with other shareholders to build more than a 15 percent holding. Icahn received U.S. regulatory approval on April 10 to buy as much as 25 percent of Dell’s outstanding shares.
Icahn didn’t immediately return a message seeking comment.
Michael Dell and Silver Lake’s original bid to take the company private at $13.65 a share has been opposed by the company’s largest shareholders as too low. The computer maker said last month that it got competing offers from Icahn and Blackstone that may be superior.
“All along I have been saying that it behooves Dell to get this deal done ASAP before more bad PC data causes another reset in the valuation,” said Jim Kelleher, an analyst at Argus Research. “Financial buyers, as opposed to strategic buyers, have a return cycle. They don’t have the patience to ride out down cycles.”
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