The Dell Leveraged Buyout, Part 1: Dangerous Dealings, or Slam-Dunk Success?

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Last week I told you my life story (part 1 of it, anyway), and this week I’m going to do something almost as unexpected: pick apart a recent, high-profile deal and show you how to analyze it with video tutorials, Excel models, and more.

This “high-profile deal,” of course, is Silver Lake’s highly controversial $24 billion leveraged buyout of Dell.

And it’s an excellent example to learn from because of all the different elements:

  • Microsoft’s participation (to what end?) via the $2 billion subordinated note it’s investing in.
  • It’s not an acquisition of 100% of the company since Michael Dell is rolling over his equity and contributing more cash.
  • The valuation and offer price are questionable, with Southeastern Asset Management claiming that the company is worth $24.00 per share rather than $13.65 per share.
  • Scenarios for revenue and expenses will be very important because it’s a quasi-turnaround: Dell needs to transition away from its declining desktop and notebook businesses and move toward tablets, software, and services. And that may or may not work out.
  • Finally, post-transaction acquisitions will play a huge role here because Dell is unlikely to achieve massive growth organically.

Let’s get started with my favorite model of all: the Excel kind.

First Things First: Have I Gone Crazy?

We’ll get the most obvious question out of the way first: what if you’ve signed up for one or more of our financial modeling courses?

Have I gone crazy by releasing this case study for free on this site and in our YouTube channel, when you normally have to pay to access such in-depth case studies?

The answer is no – because I’m only releasing part of the case study on M&I for free.

We’ll be skipping over large portions of it, my explanations won’t be as detailed, and I won’t walk through everything step-by-step.

So think of this as a “preview” for the full thing more than anything else (though you’ll still learn more from this set of free tutorials than you will from many classes that cost $3,000+).

I will create a special “bonus area” inside the BIWS site and you will be able to access the full case study if you’ve signed up for the Fundamentals and Advanced courses.

There, you’ll get access to the step-by-step videos, more in-depth explanations, and new in-video quizzes so you can test yourself as you move along.

No, I don’t have an exact ETA yet, but it will certainly be done much sooner than the 5-part case study here.

Your Mission: The Case Study Itself

Here’s the PDF that lays out exactly what we’re going to cover in this leveraged buyout case study.

The short version:

  • Part 1: Set up the model and the assumptions and gather data for everything.
  • Part 2: Create revenue and expense scenarios.
  • Part 3: Create the debt schedules, calculate interest, and link the model. (NOTE: Order swapped from what is in the PDF above)
  • Part 4: Build in support for post-buyout acquisitions (bet you haven’t seen that one before…).
  • Part 5: Answer the case study questions and create your presentation.

Private Equity Case Studies 101

We’re in the middle of another multi-part series on hedge fund case studies, so it’s easy to forget that I already wrote about PE case studies years ago in a 3,017-word post.

To summarize, there are 3 types of case studies in interviews: long-form (you have several days to a week and you must present a comprehensive analysis), medium-length (you have a few hours on the day of the interview), and speed test (build an LBO model in 30 minutes starting from a blank page).

This one will be an example of a long-form case study, which means that the qualitative part and your presentation are just as important as the numbers.

And yes, you must present a “Yes/No” investment recommendation and support it with solid arguments, and then explain the risks and how to mitigate them.

This is an advanced case study. It is not for the faint of heart. If you are new to modeling, you will not be able to follow along with everything here.

But you will still learn something about how to pick apart deals and analyze them, which is why you’re reading this site, right?

How to Gather All the Data: Your Video Tutorial

(I highly recommend full-screening this video in 720p so you can see everything better.)

Table of Contents:

  • 0:03 – Introduction and Case Study Overview
  • 6:00 – Revenue and Market Share by Business Segment
  • 7:20 – Where to Find the Data
  • 11:28 – Transaction Assumptions
  • 15:23 – Sources & Uses Schedule
  • 17:23 – Debt Assumptions
  • 19:39 – Impact of Assumptions on Everything Else
  • 21:39 – Summary & Recap

Here are most of the documents you need in this single ZIP file below (including the blank and completed Excel files):

Here’s a quick summary of why you need each one, or at least why you should look at the documents in each category:

  • Analyst Presentations – Lots of additional facts, figures, and metrics are here; you can also get a sense of management’s wildly optimistic growth expectations by reviewing these presentations. Be skeptical, of course, but still be aware of how much they think they will grow.
  • Earnings Call Transcripts – Sometimes they’ll disclose metrics here that are not mentioned anywhere else – in Dell’s case, for example, they give numbers for new IT services signings that do not appear in the filings. Those numbers plus their backlog will help in projecting services revenue later on.
  • Equity Research – No, don’t rely on research for your own projections or investment thesis, but it is useful for finding data such as market share, units shipped, ASPs, and so on. You’ll see the key reports we’re using here. Also note that Dell actually discloses a lot of market share information in its own financials (see below).
  • Filings – It’s a really bad idea to analyze a company without reviewing their annual report / 10-K first. The only issue here is that we’re going off of last year’s 10-K since the most recent one hasn’t been released yet.
  • Filings Excerpts – Look how nice I am: I even extracted key portions of the 10-K that you’ll use throughout the model and made separate files here. Don’t expect this red carpet treatment in real case studies or interviews.
  • Financials – The Excel version of Dell’s financial statements – a huge time-saver, unless you really want to spend time copying and pasting numbers from PDFs. Also, they include revenue and operating income by segment and market share data in here.
  • Merger Docs – Helpful for reviewing the capital structure, rollover details, and anything else that might impact the deal analysis. Most of this is boilerplate and incredibly boring (corporate law is so much fun!), so only a small portion will be useful.
  • Valuation, Debt Overview & Other – These are from sources like Factset, Thomson, and Capital IQ, and are useful for reviewing the transaction itself, details on the debt, and also taking a brief look at valuation multiples. These are not essential at all – they’re just another way to verify facts and figures.

You can get most of these documents from the investor relations section of Dell’s site.

Yes, it’s tricky to get equity research unless you know someone with access, but even there you can get free reports for most companies if you have a TD Ameritrade (or other brokerage) account.

What to Simplify in This Type of Case Study

You’ll always have to make judgment calls about what to simplify in models and case studies like this. Yes, you could create a model that tries to capture every last detail, but this is counter-productive in time-pressured case studies.

In this case, yes, you have 5 days to complete and present this analysis, but your time is much better spent on data gathering and even calling industry experts, partners, suppliers, customers, and so on than it is on getting small details correct:

  • Close Date – Technically, the deal will probably close in Q2 of Dell’s next fiscal year. But a stub period would create extra work and add little value to the analysis, so we’re just a assuming transaction close at the end of this past fiscal year.
  • Financial Statements – Take a look at my comments here (Shift + F2) and you’ll see some of my simplifications (see the Equity section and the “Existing Long-Term Debt” line item for examples).
  • Existing Debt – Rather than bothering to project each tranche separately (there are over a dozen), we’re simplifying it and consolidating all the existing debt into one tranche.

In parts 2 – 5 of the case study, there will also be simplifications because of the lack of time (“5 days” is not much time when you’re already working full-time).

Unusual Assumptions and Sources & Uses

You’ll see that the setup for these sections is somewhat unusual, mostly because different parties are contributing funds for the deal – it is not like a traditional LBO where it’s just investor equity from the PE firm plus debt, and where you can make a simple assumption for the percentage of each one.

As a result, we have to factor in the excess cash (repatriated from overseas), the cash and rollover equity from Michael Dell, and make sure that we don’t end up with a negative investor equity number by linking the debt percentages to the wrong number (i.e. the equity purchase price rather than the actual amount of funding required in the deal).

The rest of these schedules are not “unusual” necessarily, but they are more complex because of the options to refinance or assume existing debt and the multiple tranches of debt.

Oh, and Dell has not yet released the 10-K for its recently-ended fiscal year, nor has it released finalized deal terms… so some of these numbers may shift around in the next parts.

The debt section, in particular, is a lot of guesswork in the absence of actual interest rates and principal repayment terms.

For now, I’m just assuming a modest increase over the interest rates on the company’s existing debt balances (see the files and video for more) since its credit rating was downgraded after the deal announcement.

Tweaking the Assumptions

Play around with the assumptions here and you’ll see some interesting trends… and points you should think about:

  • How does the offer premium affect the post-deal ownership percentages? Why is that?
  • What about refinancing existing debt, and the percentage of debt used?
  • What accounts for the fact that Michael Dell goes from 14-15% ownership pre-deal to over 75% post-deal?
  • Would it even be possible to do this deal without funding from Michael Dell, his rollover, and the excess cash? Why or why not?

I’m not going to “answer” these questions – they’re for you to think about and draw your own conclusions on.

What to Do Next

Download the model and files and practice it yourself, or at least tweak the version I have and see if you can answer those questions above.

Then, subscribe to our new YouTube channel – who knows, I may not even release 100% of the rest of this case study on M&I – but it will definitely be on YouTube.

And I can guarantee there will be many new YouTube tutorials over the next year that will NOT appear on this site.

So it’s in your best interest to subscribe, unless you want to miss out on all of that.

And yes, this tutorial series and the rest of the upcoming YouTube videos will be added to BIWS in a “bonus area” on the site.

As AJ would say, “Just give it a few hours” (OK, maybe a bit more than that…).

The Rest of the Series:

About the Author

is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys learning obscure Excel functions, editing resumes, obsessing over TV shows, and traveling so much that he's forced to add additional pages to his passport on a regular basis.

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42 Comments to “The Dell Leveraged Buyout, Part 1: Dangerous Dealings, or Slam-Dunk Success?”

Comments

  1. Alex says

    This is great! Will you be doing more of these case studies in the future? I’d definitely be willing to purchase these case studies, especially for recent mergers or restructurings.

    • says

      Thanks! Yes, that’s the plan, though they may not be as complex as this one. I’ve thought about releasing them separately, but would rather just add them to our existing courses for now until we have a lot more available.

  2. satish says

    fantastic tutorial!. Is a heinz tutorial on the books too in the future or an office depot/office max buyout happening?

    Again. Thank you for your efforts!

    • says

      Thanks! I’ve thought of both of those but probably not in the short-term since we still need to finish this one first (and I don’t want to only write about case studies and deals on the site). If no better / more interesting deals happen this year, I may revisit one or both of those.

  3. vp says

    While as the owner of this site you can do whatever you want to..but i wonder it adding a tech company case study is really adding great value or even variety to this site- we already had a fantastic Tech case study i.e.Yahoo-MS..
    Understandbly, its a high profile deal, after 2008 crisis,but still..

    • says

      Thanks for your feedback. It’s not a full course, just a brief added case study, similar to the other bonus case studies on the site. And it’s very different from the Yahoo one, even though they’re both in tech. Other industries will be coming later on.

  4. Phillipe says

    Hey Brian,
    First off, this stuff is amazing! I really appreciate that you’re willing to cover case studies with us.
    I’ve been trying to build an LBO model of a major buyout in the 90s, I have all the income statement projections and have basically built a DCF valuing the LBO target. However, I can’t seem to get the balance sheet and cash flow projections down and hence I can’t build the LBO or do a returns analysis.
    What kind of further info should I be looking for?

    • says

      Thanks! It’s really hard to say without seeing your model – I would take a look at the courses we offer or at least the free samples and see if you can track it down based on that.

      One tip I can give you is to avoid even building Balance Sheet projections… they’re not necessary in a simple LBO and you can do a “quick and dirty” version as long as you simply track the cash and debt and estimate the change in operating assets and liabilities.

      For the cash flow projections, make sure you’re only projecting Cash Flow from Ops and CapEx and skipping everything in the Financing section other than debt repayment – the more you simplify, the easier it is to get it working.

  5. Rohan says

    Hey brian , will this case study be added as package of its own (in detail) on BIWS as ‘Technology modelling’ just like oil and gas modelling , REIT etc?

    • says

      Probably not, because the Advanced Course is already “technology modeling” since it features 2 technology companies. I may go back and replace one of the existing modules in the courses with this case study, though.

  6. Hyunwoo says

    awesome….

    I respect your hard working.

    It must have taken more than “a few” hours..

    now I have a broad idea of getting data, making a model.

    wanna get to know more about it.

    I can’t wait for part 2!!!!!

  7. Stefan says

    I’ve been reading your site for 3 years now and I am a more than happy customer of your Fundamental course. I thought that one day you would run out of things to say about M&A etc., but this is probably one of the most interesting and useful things ever on this fantastic site. That’s why I always come back here. Thank you!

    • says

      I am waiting for Dell’s final FY2013 numbers to be released first, which should be sometime this week, before posting Part 2. So I would say sometime in the next 1-2 weeks for Part 2, the rest will take a bit longer because I’m also working on a revamped modeling course that needs to be out by the end of April.

      • Alex says

        The revamped modeling course sounds great! What can we expect? As a premium package subscriber, I’m looking forward to the update. Appreciate all the work Brian!

        • says

          A bunch of new things are coming, details will be announced by April 1 once I have a better idea of the completion date. If you take a look in the Excel/Fundamentals/Advanced courses and the modules there, you’ll already see some of it in place.

          • Alex says

            I was just about to start the Advanced modeling lessons, but do you think I should wait for the revamp?

          • says

            It’s not a revamp of the Advanced course, so you should be fine getting started with those. That course will be changed around eventually as well, but not in the near-term.

          • Alex says

            Got it thanks! Also, do you have any recommendations for books to read before starting my fulltime analyst stint this summer. I’m going to be in a generalist m&a / restructuring group.

          • says

            Hmm, for M&A I think you’re pretty well-covered by the BIWS courses.

            For Restructuring, honestly I’m not sure about what books are good, but if you’re looking for a course the Wall Street Training one is probably your best option. Completely different price range and not as good value (in my opinion), but he knows his stuff quite well and explains it well.

            Eventually I want to create a course on Restructuring, but it won’t be out anytime soon.

  8. Tokyobanker says

    Hi I canot find the dell case neither can i find the bonus area after login..Is there anything I am missing?

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