The Enduring Magic of Michael Dell
Forget crypto's wizards, Michael Dell might be pulling the greatest magic trick of 2021.
Michael Dell has turned a $3.8 billion stake in an outdated maker of PCs (remember those?) into a share of a combined hardware and software maker worth over $40 billion.
This past week, his eponymous company sold its 81% stake in VMware creating an independent software company worth around $60 billion.
It is quite a feat and shows what a few astute strategic moves combined with some financial alchemy can achieve if you get lucky with an acquisition and are willing to get creative with surfing the capital market waves.
How did he accomplish this feat? He pulled of a series of tricks in parallel.
Michael Dell contentiously took his old PC company, Dell Inc, private in 2013.
Then he purchased the gigantic corporate server and storage company, EMC, for $67 billion in 2016.
VMware was itself bought by EMC in 2003 for less than $1 billion in a move that now looks like one of the most successful tech acquisitions ever.
Now Dell+EMC is shedding their 81% of VMware but not before getting it to issue a special $12 billion dividend to help pay down Dell's hefty amount of debt (previously ~$32 billion).
All of this was financed by a private equity firm, Silver Lake which has also now walked away with a very successful payday and a feather for financial complexity in its cap.
It is all pretty impressive, especially since it is hard to find anyone who is far worse off.
Why bring it up?
Well, aside from the simple financial wizardry of it all, two reasons:
Financial deal making can often get itself a bad name but it has been carried out very successfully in this case. Despite a rash of legal cases, no real objections have been successfully lodged here.
More importantly, it is interesting to think about which of the two firms you would prefer to own (or not own) in 2022-23 as a proxy for the wider technology market.
VMWare is a classic software company that specializes in virtualization and will now gain its independence and an ability to build up its capability in the ever hot cloud computing space.
Meanwhile, Dell computers still makes a terrifyingly 60% of its revenues in PCs but is now branching out into "edge computing" and tries to also sell dull but reliable enterprise software as well.
The former's shares are quite expensive (22x forward earnings) and hip while the latter is far cheaper (11x earnings) and yet also with healthy margins, low debt, a simpler capital structure and is planning to fund dividends and buybacks.
It is an interesting choice but if forced we might like the combination of steady if unspectacular profits and Michael Dell's wizard powers combined with a replenished balance sheet over VMware's plans for the cloud.
There are lots of cloud computing companies out there, there are very few magicians.
What would you pick?
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