DealBook: Blackstone Drops Out of the Bidding for Dell

Joe Raedle/Getty ImagesDell’s founder, Michael S. Dell, and the investment firm Silver Lake are offering to take the company private in a $24.4 billion deal.

10:25 a.m. | Updated

The Blackstone Group has walked away from the bidding for Dell, the computer maker confirmed on Friday.

The private equity giant, along with a separate bidder, the activist investor Carl C. Icahn, had been inspecting the books of the personal computer maker before deciding whether to make a rival bid to the $13.65-a-share offer to take the company private from the company’s founder, Michael S. Dell, and Silver Lake Partners, a technology-focused private equity firm.

Blackstone decided to withdraw after discovering that Dell’s business was deteriorating faster than it previously understood, according to a letter sent to the special committee of Dell’s board on Thursday. Among the reasons Blackstone cited include “an unprecedented 14 percent market decline in PC volume in the first quarter of 2013, its steepest drop in history, and inconsistent with management’s projections for modest industry growth.”

The personal computer industry has been grappling with falling prices and with competition from smartphones and tablets. Its weakness was vividly illustrated by a report last week by the International Data Corporation that showed a sharp drop in global sales.

PC unit sales overall in the United States fell 12.7 percent in the first quarter from a year earlier, according to the report. At Dell, United States shipments were down 14 percent, while worldwide shipments were down more than 10 percent.

Blackstone, which had been working with the investment firms Francisco Partners and Insight Venture Partners, last month outlined an offer of more than $14.25 a share for control of Dell, but not for the whole company. Part of Dell, under that scenario, would still be publicly traded in what is known as a stub.

From the beginning, there had been dissension within Blackstone about whether it should pursue an offer, people close to the firm said. Blackstone, worried that they would be used as a stalking horse, negotiated with Dell’s special committee to reimburse the firm for its costs related to pursuing a bid whether it ultimately made a binding bid or not.

The withdrawal of Blackstone leaves Mr. Icahn as the only potential rival to the $24.4 billion buyout proposal from Mr. Dell and Silver Lake.  Shares of Dell fell more than 3 percent in trading on Friday morning.

On Tuesday, the Dell special committee announced that it reached an agreement with Mr. Icahn that limits his ownership stake in the company while allowing him to contact other shareholders about a possible bid for the computer maker.

Mr. Icahn has previously outlined an offer of $15 a share for about 58 percent of the company. Under that plan, he would have a 24.1 percent stake in Dell.

“My affiliates and I expect to engage in meaningful discussions with other Dell shareholders, discussions that we believe will help to facilitate alternatives to the existing transaction with Michael Dell,” Mr. Icahn said in a statement on Tuesday.

Mr. Icahn and Blackstone were the only two preliminary bidders to emerge last month from the special committee’s process of soliciting potential alternatives, in what is known as a “go-shop.”

On Friday, a Dell spokesman said, “As the board’s special committee continues to oversee its process to ensure the best possible outcome for Dell shareholders, we remain focused on our customers and on providing innovative products and solutions to help them succeed.”

Blackstone’s letter to Dell’s special board committee is below:

Boulder Acquisition Corp.
c/o Blackstone Management Partners L.L.C.

April 18, 2013
STRICTLY PRIVATE AND CONFIDENTIAL

Special Committee of the Board of Directors of Dell Inc.
One Dell Way
Round Rock, Texas 78682
Attention: Alex Mandl, Presiding Director

Dear Alex,

I want to thank you, the Special Committee, and its advisors for inviting us into the process and for granting us due diligence access to Dell Inc. I also want to express our gratitude to Michael Dell and the management team for spending time with us and providing us with information and data relating to the business plan and financial forecasts of Dell.

You have asked for an update of our views after the intensive due diligence that we just completed. While we still believe that Dell is a leading global company with strong market positions, a number of significant adverse issues have surfaced since we submitted our letter proposal to you on March 22nd, including: (1) an unprecedented 14 percent market decline in PC volume in the first quarter of 2013, its steepest drop in history, and inconsistent with Management’s projections for modest industry growth; and (2) the rapidly eroding financial profile of Dell. Since our bid submission, we learned that the company revised its operating income projections for the current year to $3.0 billion from $3.7 billion.

For the reasons set forth above, among other reasons, on behalf of Boulder Acquisition Corp., Blackstone Management Partners, Francisco Partners, Insight Venture Partners, and Riverwood Capital, I regret to inform you that we will likely not pursue this opportunity. I would welcome the opportunity to speak to you to follow up on these matters and answer any questions that you may have.

Sincerely,

BOULDER ACQUISITION CORP.

By: /S/
Name: Chinh Chu

cc: Roger Altman, Evercore Partners

DealBook: Blackstone Studying Dell, but Decision Is Uncertain

Brendan McDermid/ReutersEarlier this year, Blackstone hired Dell’s chief in-house deal maker, David Johnson.

The private equity giant Blackstone Group is weighing whether to make an offer for all or part of Dell as a Friday deadline looms, people briefed on the matter said Thursday.

But some people close to Blackstone are skeptical that any offer will materialize.

Rivals to the proposed $24 billion buyout of the computer maker by its founder, Michael S. Dell, and the private equity firm Silver Lake have until midnight Friday to submit their alternative bids, under a process being run by a special committee of the Dell board.

Among the companies that have taken a look at Dell’s books under that “go-shop process,” Blackstone is regarded as the likeliest to make an offer, the people briefed on the matter said.

The private equity firm, which has spent a surprising amount of time and effort examining Dell’s books, has the firepower to organize a rival bid.

And it has an important tie: Blackstone hired Dell’s chief in-house deal maker, David Johnson, who has previously worked at I.B.M., earlier this year. Mr. Johnson is seen as one of the primary advocates behind Blackstone’s interest, according to the people briefed on the process.

As of late Thursday, Blackstone was still considering its next move, these people said. A variety of options have been on the table, including making a bid for some or all of Dell.

The firm has talked to Southeastern Asset Management, a large shareholder in Dell, about the possibility of contributing its 8.4 percent stake toward a rival deal, the people briefed on the matter said. Southeastern has argued publicly and privately that it would favor a proposal that would allow all shareholders to continue being investors in Dell.

And Blackstone has sounded out potential leaders for Dell should the company’s founder decide to step down from an active managerial role.

The firm has asked Mark V. Hurd, Oracle’s president and the former chief executive of Hewlett-Packard, according to a person briefed on the matter, although he did not appear to be interested.

Hopes for a rival bid from Blackstone have buoyed Dell’s stock in recent weeks, with its price trading above the $13.65 a share that Mr. Dell and Silver Lake are offering.

Several shareholders, including some of Dell’s biggest outside investors, have proclaimed for more than a month that the current offer by Mr. Dell and Silver Lake is too low. Shareholders like Southeastern and the billionaire Carl C. Icahn have demanded that the Dell board consider alternatives, or risk having the bid defeated in a shareholder vote.

The emergence of an alternative, potentially higher bid could prod Mr. Dell and Silver Lake into sweetening their offer.

Yet there is also a good chance that no other suitor emerges. Others that have looked at Dell’s books, including Hewlett-Packard and Lenovo, are not considered serious bidders, instead using the go-shop to examine the confidential financial information of a competitor.

If there is no rival bid, next week, Dell is expected to begin trying to persuade shareholders that the buyout offer on the table represents the highest price the company could fetch for its rapidly declining business.

Blackstone may also use other strategies. It spoke to General Electric’s giant finance arm, GE Capital, some time ago about potentially buying Dell’s financial services division, one of these people said. The division lends money to customers of the computer company. But it is unclear whether GE Capital, which has been selling assets as part of its recovery from the financial crisis, would be interested in pursuing a deal, this person said.

Blackstone has participated in big technology buyouts in the past, including the $17.5 billion deal for Freescale Semiconductor in 2006 and the $10.8 billion deal for SunGard Data Systems in 2005. Still, any move by Blackstone on Dell would be unusual. Private equity firms have rarely jumped another’s deals, a phenomenon that has drawn scrutiny recently in an antitrust lawsuit filed in Boston.