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In a different article it says "Based on figures revealed on Monday, he has been able to turn a 14 per cent stake in his old PC company, worth $3.5bn, into a 7

In a different article it says "Based on figures revealed on Monday, he has been able to turn a 14 per cent stake in his old PC company, worth $3.5bn, into a 72 per cent interest worth $35bn in his enlarged tech conglomerate." How did he do that?

godzillabrennus 8y ago
Borrow money to buy the company and take it private when value is low. Increase value of company and in the process pay back the loans.
Blackstone4 8y ago
Here's an example. Company A (let's call it Dell but the figures are made up) is public and has an Enterprise Value (EV) of $100bn (EV includes net debt and equity). It has no debt and Michael Dell owns 14%. Dell is taken private by Michael, Silver Lake and co. using $40bn of equity (with Michael rolling his 14% stake into this equity) and $60bn of debt. Michael Dell's original 14% interest was worth $14bn. But $14bn of $40bn is 35% of the total equity. The rest is debt.
- Blackstone4 8y ago
  Above I explained how Michael Dell increased his equity percentage. How did the value of his stake increase so much? There are various ways this can happen. Using the figures from my answer above: - If Dell is able to increase its profitability by 50%, then in theory the EV should increase by the same amount. So $100bn goes to $150bn. But debt stays the same whilst equity goes from $40bn to $90bn ($150bn EV - $60bn debt). This means Michael's stake is now worth $31.5bn (35% of $90bn). - Private equity companies are often valued on multiples of EBITDA (which roughly translates into profit for capex light companies). So Dell might have originally be valued at 5x times EBITDA to get to the EV of $100bn. But let's say the valuation multiple has risen to 6x (since markets valuations have been going up since the Dell take-private and Dell is now a more attractive mix of software + hardware rather than just being hardware which implies a lower valuation as its more cyclical). A 6x EV/EBITDA multiple will take the EV to $120bn (assuming flat profit). This will increase the equity to $60bn ($120m EV - $60bn debt). Michael's stake will be worth $21bn (up from $14b). Combine an increase in profitability with a high valuation multiple, you can go from $14bn to $40bn fairly quickly if things go your way. I can't remember but Michael may have put in cash during the take-private on top of rolling his original equity stake. This would have also increased his stake.
  - charlesdm 8y ago
    Excellent way of explaining it. It also shows why the world economy is very much debt driven. In addition to the interest generally being tax deductible, the payoff can be huge if you get it right. The upside is often disproportionally higher than the downside.
  - ataturk 8y ago
    I have not been following Dell very closely, but I have a hard time believing that a valuation would rise from $100B to $150B without also increasing debt. There's too much temptation there. Over the years, Dell has gamed the system numerous times. One particular incident that stands out is when Dell opened up a facility in NC and got a huge tax break from that state and then as soon as the tax break expired, Dell announced they were closing the factory or whatever it was that was there. Typical slimeball business tactics there. When Dell went private, I figured it would be wound down quietly and dissolved, but that didn't happen. I'm quite surprised at this outcome and in finding out about this latest story. My only qualms with it are that shareholders have been taken for a ride. First, they go private. Private equity is where it's at these days for delivering profit directly to large hedge funds and institutions, totally bypassing the public markets (and cutting out regular investors completely). I realize VMWare has been successful, but then I read about VMWare stock buy backs, "the swindle of the 2010s" it's what everybody is doing, including the largest components of the S&P 500, Apple, Amazon, Netflix, and Google. Four stocks account for all the gains on the S&P and they're all doing buy backs to keep their prices afloat. This all makes me think that stocks are simply a confidence game and that all of us little people are going to get taken down when the people running the game decide it's time to pull the rug out. ETA: I just read through more of the comments relating to Dell laptops and realized what absolute trash they still are. Dell was once a quality name, no more.

godzillabrennus 8y ago

Borrow money to buy the company and take it private when value is low. Increase value of company and in the process pay back the loans.

Blackstone4 8y ago

Here's an example. Company A (let's call it Dell but the figures are made up) is public and has an Enterprise Value (EV) of $100bn (EV includes net debt and equity). It has no debt and Michael Dell owns 14%. Dell is taken private by Michael, Silver Lake and co. using $40bn of equity (with Michael rolling his 14% stake into this equity) and $60bn of debt. Michael Dell's original 14% interest was worth $14bn. But $14bn of $40bn is 35% of the total equity. The rest is debt.

Blackstone4 8y ago
Above I explained how Michael Dell increased his equity percentage. How did the value of his stake increase so much? There are various ways this can happen. Using the figures from my answer above: - If Dell is able to increase its profitability by 50%, then in theory the EV should increase by the same amount. So $100bn goes to $150bn. But debt stays the same whilst equity goes from $40bn to $90bn ($150bn EV - $60bn debt). This means Michael's stake is now worth $31.5bn (35% of $90bn). - Private equity companies are often valued on multiples of EBITDA (which roughly translates into profit for capex light companies). So Dell might have originally be valued at 5x times EBITDA to get to the EV of $100bn. But let's say the valuation multiple has risen to 6x (since markets valuations have been going up since the Dell take-private and Dell is now a more attractive mix of software + hardware rather than just being hardware which implies a lower valuation as its more cyclical). A 6x EV/EBITDA multiple will take the EV to $120bn (assuming flat profit). This will increase the equity to $60bn ($120m EV - $60bn debt). Michael's stake will be worth $21bn (up from $14b). Combine an increase in profitability with a high valuation multiple, you can go from $14bn to $40bn fairly quickly if things go your way. I can't remember but Michael may have put in cash during the take-private on top of rolling his original equity stake. This would have also increased his stake.
- charlesdm 8y ago
  Excellent way of explaining it. It also shows why the world economy is very much debt driven. In addition to the interest generally being tax deductible, the payoff can be huge if you get it right. The upside is often disproportionally higher than the downside.
- ataturk 8y ago
  I have not been following Dell very closely, but I have a hard time believing that a valuation would rise from $100B to $150B without also increasing debt. There's too much temptation there. Over the years, Dell has gamed the system numerous times. One particular incident that stands out is when Dell opened up a facility in NC and got a huge tax break from that state and then as soon as the tax break expired, Dell announced they were closing the factory or whatever it was that was there. Typical slimeball business tactics there. When Dell went private, I figured it would be wound down quietly and dissolved, but that didn't happen. I'm quite surprised at this outcome and in finding out about this latest story. My only qualms with it are that shareholders have been taken for a ride. First, they go private. Private equity is where it's at these days for delivering profit directly to large hedge funds and institutions, totally bypassing the public markets (and cutting out regular investors completely). I realize VMWare has been successful, but then I read about VMWare stock buy backs, "the swindle of the 2010s" it's what everybody is doing, including the largest components of the S&P 500, Apple, Amazon, Netflix, and Google. Four stocks account for all the gains on the S&P and they're all doing buy backs to keep their prices afloat. This all makes me think that stocks are simply a confidence game and that all of us little people are going to get taken down when the people running the game decide it's time to pull the rug out. ETA: I just read through more of the comments relating to Dell laptops and realized what absolute trash they still are. Dell was once a quality name, no more.