Private Equity Eyes Dell, EMC, Yahoo
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Huge technology buyouts of the past few years may be just the start.
By Scott Morrison
RedHerring.com
November 27, 2006
Private equity investors have been kicking the tires of some big companies in the technology sector lately, including Dell, EMC, and perhaps even Yahoo, according to a source familiar with the situation.
Private equity’s appetite for some of the industry’s most well-known names suggests that few—if any—deals seem too large amid the buying spree that has seen Carlyle Group and Kohlberg Kravis Roberts spearhead $45 billion in technology buyouts in the past two years.
“Size is not an issue. If the public markets are not going to value these companies, then private equity will,” said the source, who spoke on the condition of anonymity.
Private equity investors are increasingly attracted to maturing tech companies because they have stable earnings, strong cash flow, and little or no debt—meaning they can afford to take on debt in a buyout.
The Blackstone Group raised eyebrows in September when it announced a deal to acquire Freescale Semiconductor for $17.6 billion. That deal, the largest technology leveraged buyout to date, was financed with almost $6 billion in high-yield bonds.
A Wall Street source close to the transaction said high demand for the bonds meant that Freescale was able to issue debt more cheaply than expected, suggesting that investors would eagerly support additional technology takeovers by private equity groups.
In a leveraged buyout, private investors typically acquire a struggling company with cash and proceeds from the sale of debt. The new owners restructure the company and use the cash it generates to pay down debt. The investors can then take the company public a few years later. Private equity groups most active in the technology sector include Permira, Texas Pacific Group, Blackstone, and KKR.
But one veteran Silicon Valley investor cautioned that private equity’s appetite for technology companies is reminiscent of the 1990s dot-com boom, during which venture capitalists eager to get in on the action made many ill-advised investments. “In 1989-99 we had drive-by venture capital, and now we have drive-by private equity,” said the investor, who asked to not be identified.
One potential buyout candidate remains Dell, the $62-billion PC maker that took advantage of its superior supply chain to drive down prices and win market share from rivals. But the once dominant PC maker has lost its edge in a difficult environment of falling prices, intensifying competition, and lackluster corporate spending for technology. Dell’s shares were down as much as 43 percent this year before recovering lost ground over the past several weeks.
Several private equity investors have in recent weeks approached Michael Dell, founder and chairman of computer maker Dell, according to the source familiar with the situation. Mr. Dell has listened to offers, the source said, but has so far not tipped his hand. Dell did not respond to calls on the matter.
However, not everyone considers Dell a target. A recent report from ratings agency Fitch suggested a leveraged buyout of Dell was “unrealistic due to the sheer size of the transaction.” Other tech sector observers, such as Paul Wick, who manages the $3.5-billion Seligman Communications and Information Fund, dismissed suggestions Dell could go private. “I just don’t see that happening with a company like Dell. It’s too big,” he said in a recent interview.
But newspaper reports indicating KKR held talks to acquire French media group Vivendi for $50 billion—in what would have been the biggest leveraged buyout in history—underscore private equity’s interest in blockbuster transactions.
Going private would enable Dell to restructure its once formidable direct sales model out of the view of shareholders, who would likely punish the company for any steps that cut the company’s already thin margins. Investors who have talked to Mr. Dell would want him to increase his stake in the company. Working against the LBO scenario is the uncertainty stemming from federal investigations into Dell’s accounting practices, as well as the company’s better-than-expected results last week. That report drove shares up more than 9 percent the following day, capping a tidy rally after briefly falling below $20 in July.
Private equity investors have also looked at EMC, worth a more manageable $29 billion. The storage hardware leader has been on an aggressive acquisition spree this year, which has included the $2.2-billion acquisition of RSA Security in September. EMC’s share price fell below $14 earlier this year amid concerns about the company’s inconsistent execution and disappointing growth. Now private investors are looking into whether it makes sense to buy EMC and hive off some of its underperforming software businesses.
Yahoo is another ailing giant that has attracted private equity attention, despite its $38-billion market cap. While still the most popular Internet destination, the company’s media strategy has floundered and its search technology has fallen behind that of rival Google, which can provide more relevant results and charge higher advertising rates as a result. Yahoo shares have fallen 36 percent from their 52-week high this year, but private equity groups remain wary of taking on a company they are not sure they can turn around.
The Fitch report said possible buyout candidates also include software company CA, formerly known as Computer Associates, and information technology services provider Convergys.
Private equity stepped into the tech sector in a big way last year with the $11.4-billion takeover of software company SunGard Data Systems by a group of seven firms. That was the first significant technology buyout since hard drive maker Seagate Technology was taken private for about $2 billion in 2000. |
