Michael Dell hits back at private equity doubters

Eponymous founder pens letter to customers in face of criticism from HP and opposition from shareholders

Michael Dell has hit back at criticism of his plans to take Dell private in an open letter to customers.

The IT giant earlier this week announced a proposed $24.4bn buyout of the firm, led by its eponymous founder and backed by private equity house Silver Lake.

Perhaps inevitably, the takeover attempt was swiftly pilloried by arch-rival HP, which provocatively suggested in a statement that leveraged buyouts "tend to leave existing customers and innovation at the curb".

But this morning it emerged that Dell's largest independent shareholder, Southeastern Asset Management, is reportedly opposed to the buyout. According to Reuters, Southeastern is "disturbed" by the $13.65-per-share offer and believes the hardware, software and services monster is instead worth $20 per share.

The softly spoken Texan, who owns 14 per cent of the firm he founded in 1984, last night hit back at his doubters in an open letter to customers, arguing that they would do better with Dell away from the prying eyes of the stock market.

"We believe that our proposed new ownership will provide long-term support to help Dell innovate, invest for growth and accelerate our transformation strategy," he said.

"We'll have the flexibility to continue organic and inorganic investment and drive industry-leading innovation."

Though history may be littered with examples of private equity takeovers that have sapped innovation, Clive Longbottom, services director at market watcher Quocirca, argued that going private is the best route for Dell and its customers.

The financial analyst community on Wall Street wrongly still sees Dell as a PC company despite a recent acquisition run that has taken in software firms such as Compellent and services giant Perot, he said.

"Dell was trying to be innovative and was hung out to dry by the financial analysts."

"By putting everything internal, Dell only has to focus on what customers want and want Silver Lake wants, rather than what the financial analysts think they should be doing. It will allow Dell to be far more innovative and take a much longer-term view. Silver Lake will probably be looking at a five-year plan, which gives Dell two to three years to sort itself out."

Longbottom rejected suggestions that Silver Lake would suck value from Dell.

"Silver Lake has been around for a long time and has quite a good track record," he said. "I think Dell has chosen the right one and this gives them the best possible opportunity for the future."

The deal, which is being financed by Dell's own cash and equity, company cash on hand, Silver Lake investment funds, rollover of existing debt and debt financing provided by BofA Merrill Lynch, Barclays, Credit Suisse and RBC Capital Markets, has been unanimously approved by the Dell board of directors.

However, Dell and his cohorts have a long road ahead before any transaction is concluded – a 45-day 'go-shop' period has been initiated in which the firm will court other bids.