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Dell's Debt-Laden Leveraged Buyout

Feb 06 2013

Image representing Michael Dell as depicted in...

Image via CrunchBase

Dell's Debt-Laden Leveraged Buyout

Whispers from the Street: Dells Wastes Million in Buyout Plan

Many people are at a loss to explain Dell's (DELL) leveraged buyout and how exactly the math will add up in the $24.4 billion takeover bid which is the largest this side of the financial crisis.

Very few people or even analysts seem worried that the consortium group organized by founder Michael Dell, Silver Lake Partners, and Microsoft(MSFT) will not happen, even though there are concerns that a mere $13.65 per share cash payout gives only a little payment to Dell's shareholders.

Those who are shaking their heads back and forth are trying to make some sense of the numbers and are stunned after hearing that the three large rating agencies (Standard & Poors, Fitch Ratings, and Moody's) stand ready to downgrade Dell's stock to junk.

They may just not realize how destructive a fall that the stock has taken in current years.

If they do not waste billions of money from investors, it can be used to finance Dell's leveraged buyout. Dell is hinting that this might indeed be the case after a filing with the Securities and Exchange Commission attached to their deal on Tuesday.

Even though Microsoft stands ready to infuse a $2 billion cash influx and there are an additional $15 billion in takeover loans, this still may not increase any of the cash flows for the Round Rock, Texas company. 

The key to this leveraged buyout is to stop dividend payments and a share repurchase program in an effort to conserve cash that could help take care of higher debt and interest costs. Dell does not believe that this will seriously impact their cash despite what the ratings agencies say.

Dell has only been paying a mere 8-cent-per-quarter dividend since the last half of 2012; the majority of cash saved will come from scrapping a stock repurchase plan.

This potential end to the repurchase plan and past results that have been disastrous-might help those who are trying to figure out all the maneuvering going on for this deal.

Just by putting an end to this plan might help the owner of Dell and his group to finance and actual see a profit from the takeover bid. This might also show that Dell is more stable than what their earnings suggested recently.

A Dell spokesperson, David Frink, declined comment about anything other than their public filing when reached by email.

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