Dell Is Going Public Again [Without an IPO]! Does it Impact Supplier Risk?
Written by Vandana Mohanchandran
In 2013, Dell Technologies decided to go private in a US$24 billion leveraged buyout led by private equity firm Silver Lake Partners and Dell Technology founder Michael Dell. During the last five years, post privatizing, the company’s stock price dropped 31%, resulting from falling personal computer sales, the upswing in mobile computing technology, and the onset of the cloud computing revolution, which negatively impacted Dell’s sales and profits.
Dell had initially stated that once its recovery was in progress, it would go public once again. However, Dell’s return is far more complex than previously anticipated considering that there will not be an initial public offering. Additionally, the company leans heavily on its 2016 acquisition of EMC and its software unit, VMWare.
Dell’s decision to go public
In 2016, when Dell acquired enterprise storage business firm EMC in a cash-and-stock deal valued at US$67 billion, it also acquired EMC’s approximately 80% majority stake in cloud computing and platform virtualization software and services company VMware. The acquisition of EMC by Dell is one of the largest-ever acquisitions in the technology sector.
After acquiring EMC, Dell incurred an enormous debt burden. Payments were made to EMC shareholders partly in cash and partly with a new stock representing the controlling stake in VMWare. At present, Dell is proposing to buy out owners of the tracking stock with a combination of cash and Dell’s own newly issued class of stock. The new stock will now be traded on the New York Stock Exchange, suggesting that Dell is once again becoming a public company.
Does Dell’s new publicly traded stock mean an IPO?
An IPO, or initial public offering, is not simply the listing of a company’s stock for public trading. The “offering” is the sale of shares to the public to raise money and either pay off prior investors or support the company’s funds. However, Dell is not selling any new shares or raising any money. It is merely exchanging one kind of stock for another. Similarly, the Swedish music streaming company Spotify’s offer to publicly list its stock in April 2018 also did not qualify as an IPO, considering the fact that the company just let existing shareholders start trading their stock on an exchange. Spotify did not sell any new shares or raise any money from the activity.
Ownership of Dell’s new “C” class of stock
According to Dell, the shareholders of the new “C” class stock would own 21% to 31% of the company after the exchange, depending on the number of people choosing the cash or stock option. Only US$9 billion in cash will be available to pay off about US$22 billion worth of tracking stock. Hence, it is expected that not many would opt for the cash option. Michael Dell and his private equity partners are expected to retain substantial control of the company since the class of stock they own has greater voting rights than the new class “C” shares.
Does this impact Supplier Risk for Dell’s business customers?
Over the last five years, Dell has seen a lot of changes which affected its clients and business operations. One of the reasons why Dell is deciding to go public again is the fact that the company is currently doing much better than when it went private. Revenue in its latest quarter rose 19% to US$21.4 billion while the company’s net loss fell by 55% to US$500 million. Adjusted earnings before interest, taxes, depreciation, and amortization rose 33% to US$2.4 billion.
Although Dell is doing well in most of its focus areas, according to Supply Wisdom, for Dell’s latest quarter, the company’s revenue per employee is low. Increased efficiency from employees lead to expanding margins and improved profitability. Additionally, Dell’s working capital is negative, which could affect the company in repaying its current expenses.
Dell is taking a nontraditional route back into the public markets. Dell had been exploring several options for going public, including reports of an unusual reverse merger where it would have sold itself to VMware. The company acknowledged that it had considered a “negotiated business combination” with VMware in addition to an IPO.
With these developments, potential supplier risk arising out of Dell’s operations are no longer as high as they were back in 2013. Dell’s future, of course, will depend on how well they capitalize on the next big things in computing. There are opportunities in the space, particularly in edge computing and the internet of things. In order to sustain momentum in growth, Dell must collaborate with external cloud computing companies and not compete against them. Whether the anticipated impact of Dell going public are positive or negative, it is important to continuously monitor risks, potential disruptions to business operations, and how it can affect buyers.
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