The Dell Leveraged Buyout, Part 1: Dangerous Dealings, or Slam-Dunk Success?
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
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:
- Part 1: Data Gathering, Setup, and Model Assumptions
- Part 2: Creating Revenue & Expense Scenarios
- Part 3: Completing the Debt Schedules and Interest Expense Calculation
- Part 4: Building In Support for Post-LBO Add-On Acquisitions
- Part 5: Answering the Case Study Questions and Presenting Your Findings
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