Monday, 25 March 2013

Barbarians at the Gate II

Barbarians at the Gate is the name of the scintillating book that detailed the leveraged buyout of RJR Nabisco in the mid 1980s. It was made into a movie as well and for a long time it was the biggest M&A transaction in the world. I strongly recommend the book, if you have an interest in business. ( or if you like thrillers !)
Take 2 seems to be happening in the goings on with Dell. The resemblance to what happened with RJR Nabisco is uncanny.
The Dell story started with Michael Dell, the founder teaming up with Silver Lake, a private equity firm,  and announcing a bid to take Dell private at $13.65 a share (a 25% premium over the closing price of $ 10.88 prior to this announcement). When rumours of this started to surface in January, people thought it was not a doable deal. Dell after all is a struggling PC maker in an industry which is declining with the onslaught of tablets. In any case its a fiercely competitive and somewhat commoditized industry. Whoever wants to pay top dollars for that.
As soon as the announcement was made, there were many murmurs that this was not a good deal for the shareholders - never mind that the stock was languishing at 35% below the bid price until rumours started to float. Carl Icahn, a famous Wall Street tycoon wanted to get in on the act. So did Blackstone, perhaps the world's largest private equity fund. Blackstone offered on Friday to buy the whole company for not less than $ 14.25 a share. Carl Icahn offered to buy 58% of the company for $15 a share.
Every investment bank in town is on one side of the deal or the other. So are many lawyers. Whatever happens, they will all pocket handsome fees. Money, greed, egos and insane optimism will now decide the direction of the deal. None have said what they will do with the company to realize value from what they are paying for it. Some form of stripping it and selling off pieces while keeping the rest would be inevitable. But still, how can the ugly duckling magically transform into a swan. What of Michael Dell himself. If either Blackstone or Icahn win, he will most likely be out.
Exactly the same thing happened with RJR Nabisco then. The book beautifully portrays the actors, their egos and their insanity. KKR "won" then, but then time proved how much of a dud deal it was as they had wildly overpaid. Now RJR Nabisco as a company does not exists. Various bits and pieces are in various places although the tobacco company RJ Reynolds still exists making Salem, Camel and Winston cigarettes. 

If you like thrillers, follow the Dell saga. And if you work for Dell, maybe its time to polish that CV.


Appu said...

Finance porn would be the apt word to describe the BAG :)(at least that's what one of my colleague used to call it)
I guess characters like Carl make Wall Street more interesting! For him, Earlier it was Yahoo and now it is Dell.
Carl a tycoon? I thought you might describe with a different word!!
To me it reminds me of a Ben and Jerry take over case we had for an exam! LOL
I hope and vote for Dell to take the company private and make a comeback. For that they have to raise the bid price and still Carl will make a good profit (sigh)

Ramesh said...

@zeno - Ha Ha. Economic porn indeed :)

You had a Ben & Jerry case !!!!! Much interested. That was an acquisition by my erstwhile company and I was remotely involved. Would love to see the case and your take on it !

Carl Icahn will make a profit if he loses. He will lose a trunk load of money if he wins. What a paradox. But, of course he knows that. He is probably raising the bidding simply to make some more money.

Sriram Khé said...

I thought the era of all that leveraged buyout was all behind us ...

Now, all I can meaningfully comment is at that broad level. When you write about how Icahn will lose if he wins and wins if he loses ... that's when I make a dignified exit from the discussions, before you guys figure out I don't know a damn thing ;)

Ramesh said...

@sriram - Rubbish ; you know more than all of us put together.

Oh no the leveraged buyout has not gone anywhere. It is alive in kicking and morphed into all sorts of forms. Although the Dell transaction seems to be more an equity deal than a debt deal.

Icahn was already a shareholder of Dell. He presumably increased his stake during the last few months. Now if he loses, he will sell all his shares to whoever won the deal and make a tidy profit since the ultimate sale price has to be higher than the market price prevailing when he bought it.

On the other hand , if he "wins" the deal, he has bought a struggling computer maker, probably overpaid for it and is unlikely to make a great financial return from his investment over the years.

Hence the paradox - he wins if he loses and loses if he wins ....

Sanjay Balachandran said...

Ramesh, I like your last line in the blog. It is but true that PE firms are only interested in making money ala like financial brokers in the stock market. All consequent impacts on job losses, asset stripping, breaking down of the company etc.. get missed out in the whirlpool of business reporting and news...

At the end of the day as someone said " Its all about money honey"

Ramesh said...

@Sanjay - Of course, its all about the money. Inherently nothing wrong with that. But what beats me is why all this irrational exuberance for a failing computer maker in a declining industry .

Sriram Khé said...

Aha, so that is the Icahn-Dell-Paradox ...

Your latest follow-up comment is the one that has puzzled me throughout ... I can even understand Michael Dell wanting to take the whole damn thing private. But, why would any other investor want to invest in Dell, whose products and business model do not seem to be in sync with the rapid changes of the last two years. HP's share prices dropped by a half over the last two years, and it is clear it will be a while before HP finds its way ... HAL, er, IBM was smart to sell those aspects to Lenovo. So, ... .why all this interest in Dell?

Sriram Khé said...

Hey, from the WSJ:

Dell described bleak prospects for its business and the PC industry in a 274-page SEC filing.

So, tell me again why there is all this battle over Dell, instead of running away from it? What do they know that I don't? ;)

Ramesh said...

@sriram - I have no idea why this incredible level of interest. The players are not fools. Either they know something we all don't know or it is the same old story of ego, headlines and all the rest of it.

Sandhya Sriram said...

These people arent buying Dell to turn it around for sure. they have better gambles to play. so there, is some huge "Scrap value" hidden in this. Maybe, assets, maybe, a possible Hive off opportunity...

What Carl is trying to do reminds me of Rajanikanth in a movie where he makes a very big offer, for his competitor to counter offer and then leaves at the last stage after making the villian bankrupt. would the IIM As of the world be able to teach you such high level business strategies? you are losing quite a bit by not watching Tamil Movies.Especially those of Rajanikanth ;-)

Ramesh said...

@Sandhya - I think the "hidden value" is all ego and personal aggrandizement.

Kollywood and business is by itself too funny, but Rajnikanth ?????? My sides are splitting with laughter.Imagine the contortions with the cigarette in the boardroom :)

Appu said...

I am not sure where i can find the case though!. I have sent across what i wrote about the case! (Please dont judge me based on that) call it weird. i almost guessed the price that they should have bought it without calculating it ;)
is there something that you aren't involved in? if it is not confidential, can i know about it :P

I am more eager to write a case on this though :)

I second Sandhya Madam. btw there is one book called punchtantra biz lessons based on Rajni's movies

Ramesh said...

@zeno - Oh B&J was long long ago. I have forgotten all about it ! Intrigued by your take on the case. Interesting !!

Oh please - the day I read Panchatantra Biz lessons based on Rajni movies will be the day I know I have completely lost it :)

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