Michael Dell Really Can’t Lose: How He Transformed A Struggling PC Business Into $30 Billion

“Dell Can’t Lose,” read the cover of Forbes Magazine on November 18, 2013, as we chronicled how personal computer billionaire Michael Dell relented against Carl Icahn to take his company private in what was dubbed “the nastiest tech buyout ever.”

If anything, the cover was a tad understated.

It’s now clear Mr. Dell stands to make a fortune from Dell’s privatization, turnaround and inevitable return to public stock markets. So much so, here’s an update on what it meant to be the victor: While Carl Icahn made a small profit challenging Dell before ultimately ceding defeat, Michael Dell has accrued a paper fortune from the deal that is in itself greater than the net worth of his onetime foe, Icahn.

That’s the takeaway from Dell’s proposal on Monday to return his company to public stock markets after a nearly five-year absence. Having committed what Forbes estimates to be about $7.5 billion in Dell stock and personal cash to build his current holding, Michael Dell is now sitting on a stake in

Dell Technologies
worth about $30 billion. It means he’s made more than Icahn’s net worth in paper gains by turning around Dell, deploying deft management chops and even more skillful financial gymnastics.

Here are the eye-opening numbers: When Michael Dell took Dell private in 2013 with the help of Silver Lake Partners, he rolled $4 billion of his own Dell shares and a further $750 million in cash to get the $25 billion deal done. Partner Silver Lake, a technology-focused private equity firm, added equity to the leveraged buyout. Also important: spongy debt markets, which Dell and Silver Lake tapped to the tune of $15 billion.

Once private, Dell Technologies defied many skeptics.

Instead of imploding, the company’s personal computer business held strong. Prior to going private, Dell had also spent billions accumulating valuable businesses like IT service giant Perot Systems, cloud players Boomi and Wyse Technology, and security specialists SecureWorks, SonicWall, AppAssure and Quest Software. Within a few years, Dell stitched together acquisitions like Quest and SecureWorks into a more cohesive package of services for its PC and server customers. By the end of 2015, it was on the road to investment grade status, having both boosted profits and paid down billions in debt.

Then Dell and Silver Lake doubled down in an enormous way.

In late 2015, they used still privately-held Dell Technologies to strike a $67 billion cash and stock merger with virtualization software giant

EMC
, which had listed its valuable 

VMWare
 business on public markets. Joseph Tucci, EMC’s CEO at the time, listed an 18% interest in VMware to highlight the value of its component parts. It was Dell and Silver Lake that took notice and pounced, deciding to buy EMC and its remaining 82% interest in VMware outright.

MSD Capital, Michael Dell’s family office, committed about $2.8 billion in cash to get the EMC merger done. Silver Lake and its limited partners also doubled down, and Singaporean sovereign wealth fund Temasek was brought in to provide additional cash. Again, Dell’s ambitions were helped by loose debt markets: Nearly $50 billion in debt was raised to pay for EMC. VMware’s 18% stub was kept publicly traded. Dell also listed a tracking stock to EMC holders that was supposed to mirror VMware’s worth and bridge its $67 billion purchase price.

If the financial gymnastics are complex, Dell and Silver Lake’s announcement this morning proves the worthiness of the endeavor.

Dell’s 82% interest in VMware is the undisputed crown jewel of Michael Dell’s software and PC empire. With over $11 billion in cash at year-end 2017, it generated $8.1 billion in sales and $3.3 billion in free cash flow over the past 12-months, per Dell disclosures. Recently, VMware’s independent board of directors decided to pay an $11 billion special dividend to the company’s shareholders, filtering about $9 billion into Dell coffers and $2 billion into the public. Dell, opportunistic as ever, is using the payday to clean up its structure, also offering a complete view of Michael Dell’s five-year dealmaking saga.

Dell Technologies is proposing to buy the tracking stock it listed to pay for EMC in 2016, otherwise known as Class V shares, for a total implied value of $21.7 billion. Class V holders have the option to receive $109 a share in cash for their stock, conveniently up to $9 billion. For the remainder, Dell is offering to exchange Class V shares for soon-to-be-public Dell Technologies Class C shares. If all $9 billion in cash is exhausted, as many expect, current Class V holders will own 20.8% of newly public Dell Technologies.

Now here’s the rub.

In this scenario, Michael Dell will own 54% of Dell Technologies, valued on a pro forma basis by the company in Monday’s exchange at $61.1 billion. It implies Michael Dell is now sitting on $33 billion worth of Dell shares, purchased at a basis of less than $8 billion. We’ll see how Dell Technologies actually trades if the deal is consummated as is by year-end.

Another way of checking Dell’s coup comes from VMware.

Controlled by Dell Technologies, VMware’s stub trades on the New York Stock Exchange at a market value of $65.8 billion. Since Michael Dell is expected to own as much as 54% of Dell Technologies, he has claim to just over 40% of VMware’s value, putting his implied stake just shy of $30 billion.

Will Monday’s deal get done?

Michael Dell’s sparring partner Carl Icahn is lurking in VMware stock, though he couldn’t immediately be reached for comment. A number of hedge funds, including activist Elliott Management, also appear to have an ear to the ground. On Monday, Forbes polled a number of large shareholders for comment without getting much feedback.

If the deal does go through, it could lead to a big leapfrog in the billionaire ranks for Michael Dell. He ranked #39 on the 2018 Forbes Billionaires List, with a net worth of $22.7 billion.

For now, what’s apparent is Michael Dell and Silver Lake’s prospective coup. This could go down as one of the private equity industry’s most profitable deals. And Michael Dell may return to public markets on firm footing.

Jordan Chalfin, an analyst at CreditSights who correctly foresaw the VMware dividend, recently characterized Dell’s operating results as “stellar.” Dell forecasts as much as $88.5 billion in revenues for this year, surpassing IBM by a significant margin, and the company believes it can grow at a 4%-to-6% rate through 2023.

The company’s deleveraging push after the EMC merger has also outpaced what many thought was possible. Dell sold off incongruent parts like Perot Systems and Dell Software Group. It’s pulled from the EMC playbook in listing a minority interest in SecureWorks and a similar planned share offering for Pivotal. Dell says it’s paid down $13 billion in gross debt since closing on EMC about two years ago, and its core debt balance now stands at $37.8 billion. One big headwind was tax reform, which created a double hit of repatriation tax on foreign earnings and lower interest deductibility on its large debt stock. But Dell has found a way to simplify without magnifying leverage.

According to CreditSights’ Chalfin, “The deal will not require any debt financing, and Dell reiterated its long-term commitment to achieving investment grade metrics.” He reiterated an overweight rating on VMware bonds, stating in a separate note, “the company basically squashed the potential for a Dell-VMware combination, which was the biggest threat to bondholders. VMware will remaim a separately traded public company and an unrestricted subsidiary with no upstream guarantees.” Investors’ prior concern VMware could be used to guarantee Dell’s bonds in the event of a merger.

Here’s what Michael Dell beamed to investors and analysts on a Monday morning conference call:

Like our customers, we had to transform for a new digital era. The world of business and technology is merging in a fourth industrial revolution enabled by a perfect storm of technology tipping points. It’s computing and the Internet of Things, ubiquitous computing through broadband and 5G, along with AI, machine learning have come together to transform the way we use data. And when this is done right, data becomes the basic building block of every organization and the most valuable asset, perhaps even more valuable than products and services…

And as the amount of data continues to explode, it’s driving an acceleration in IT spending as IT departments face the dual priorities of investing in cloud-native applications for the future while also optimizing the traditional applications and infrastructure. Dell Technologies is well positioned to capture an outsized portion of this spend given the breadth of our innovations across our entire family of businesses.