How Michael Dell made $76 billion
A new kind of Dell
You remember those Dell commercials, right? Dude, you’re getting a Dell!
Well Michael Dell, the founder and CEO of Dell Technologies, is still steering the ship. He’s the sleepy leader of the tech industry. And very few people know that he’s built a $76 billion business.
Mike started with $1,000 from his college dorm room in 1984. He’s now releasing his own biography later this year as well (it’s already on my wish list). I also recommend reading Direct from Dell to learn about the history.
You see, Dell started with a brilliant business model. Direct sales over the phone. I know what you’re thinking. Who would call to buy a computer? But people did. In the thousands.
And guess what happened?
PC’s limited as it was originally known, took off.
And of all places, in Texas.
Michael Dell had a beautiful business. People would place $1,000 orders, Dell would receive the money and build the computer weeks later. He was cash rich with a negative working capital business. This model was profitable and made him rich.
Going from public to private
PC’s Limited changed its name to Dell and went public in 1988. Then went private with a leveraged buyout in 2013. Then went public again in 2018.
You see, Dell had a very successful run from the 90s until the early 2010s. The company continued to be one of the few market leaders in technology services. Not an easy job in an industry that keeps evolving.
Activist investors caught up. They targeted Dell for underperforming its peers in 2013.
This changed the trajectory of the business.
The fight to stay alive
Carl Icahn, an infamous hedge fund manager, pressured Dell to make a decision. So Michael Dell went all in and took the company private for $24 billion. He lined up capital from investors like Silver Lake Partners and Microsoft.
This was the biggest tech buyout deal at the time.
Michael Dell used this opportunity to restructure the company for the long term. And load up on lots of debt.
The Big Bet on Cloud Virtualization
But you see, while private, Dell did not sit on the sidelines.
The company focused on expanding its enterprise capabilities in two distinct areas: cloud storage and virtualization.
First, in 2015, Dell acquired EMC for $67 billion in 2015. At the time it was the largest tech acquisition in history. EMC was under pressure from another activist hedge fund, Elliott Management.
And EMC owned 80% of VMware which was a separate public company.
This big acquisition delayed Dell’s plans to go public but doubled its portfolio of technology services. It also saddled the company with more debt.
But VMware provided Dell with an exit strategy.
Going public, again
So in 2018 Dell did an unusual transaction and bought back shares of the publicly traded VMware. Dell owned 81% of the company now worth $24 billion.
This reverse merger allowed Dell to bypass the traditional IPO process.
With over $52 billion in debt, Dell would have had a challenge with the traditional process.
Now if VMware sounds familiar, I mentioned the former president Pat Gelsinger in a previous newsletter. He was the former CEO of VMware and now runs Intel.
You see, as a subsidiary, VMware has been somewhat constrained to work with other companies due to Dell’s large ownership. So Dell’s management team decided to spin off VMware. Did I lose you yet?
How spinoffs work
Buying and selling is a natural part of business. Dell has been around for +30 years. The company needs to survive by winning customers, shareholders and employees. Sometimes that requires restructuring and rebranding yourself.
So to be successful, VMware needs to operate as an independent company to avoid any customer conflicts. Some vendors wont work with VMware if it is owned by Dell.
Dell Technologies stockholders will receive a pro-rata of VMware shares. The spinoff will be worth $11.5B to $12.0B plus a special cash dividend. The deal is expected to close in the 4th quarter of 2021.
The tax motive
Spinning off an 81% equity ownership of VMware is a tax move. Dell will no longer have to report VMware on its income statement since the ownership stake is below 20%.
At the same time, Dell Technologies will continue to modernize its core infrastructure and PC businesses to create new opportunities. This will include areas such as hybrid and private cloud, edge and telecom.
After the spinoff, VMware will have a cleaner capital structure and independent governance model. Michael Dell will remain chairman and chief executive officer of Dell Technologies, as well as chairman of the VMware board. The current VMware CEO and board of directors will stay the same.
Dell Technologies will receive ~$9.3 - $9.7 billion and use the proceeds to pay down debt. A lower debt ratio will improve Dell’s Investment Grade ratings to reduce its borrowing cost.
P.S. Given the recent tax rate hike proposals, I think this is the right strategic move for Dell. Current shareholders will benefit most from this transaction.
Why spinoff assets
If you remember, IBM is doing the same with Kyndryl to unlock shareholder value. IBM wants to split its hybrid cloud business away from the Managed Services Division.
Investors have a difficult time valuing two different business models.
So this spinoff will help Dell in two ways:
- Help pay down its $52 billion in debt
- Create a new investor base for VMware
It’s early to say how this deal will look but if VMware has a clean balance sheet then it’ll be a good bet on the future of cloud computing.
If you missed this week, I provided my thoughts on the following:
Tesla earnings call: How Elon made $100 million with crypto while increasing his Bitcoin holding to $2.5 billion
Proofpoint goes private: Thoma Bravo made a $12 billion bid for this cybersecurity powerhouse. This is one of many
New software ideas
I’m creating a new section to focus on software ideas. This is an opportunity to brainstorm and come up with new businesses. Why?
Well for starters, good software is a great investment. It requires very little capex and delivers high profit margins.
The goal is to improve your idea muscle and find new opportunities.
In-game Learning for teens
The Problem: Students learn math based on a 100-year old textbook style classroom. Algebra is taught without a purpose.
Students are given the tools but don’t know how to use them.
The Opportunity: Today over 50% of students play Roblox and similar online games. You have the attention of every 9 to 15 years old in America.
The Solution: Create an add-on application to teach students about algebra and useful math problems.
Example: Sam needs to drive his virtual car from one place to another. Adding a formula function [if you drive X miles it will require Y gas] will improve the learning curve. Incremental learning is more effective than the classroom environment.
In-game learning will have a more positive impact on the youth today. You can do this with science, language and much more. Bite size pieces will go a long way if students continue to play video games more often.
If you’re interested in software businesses, check out the MicroAcquire community for more ways to buy or build micro software businesses.
India’s Covid Crisis
I’m not surprised by India's current crisis. It’s unfortunate but not surprising.
Last year the country had some breakouts but the recorded cases were low. My gut told me the country didn’t have it under control. Tough to carry out strict laws for +1 billion people if you aren’t authoritarian like China.
But now is not the time to comment. Now is the time to take action.
So last week, the Punjabi Chamber of Commerce launched a crowdfunding campaign to deliver oxygen to Indian hospitals for Covid relief. In one week, we’ve raised +$40,000 and counting. We’ve already sent the first shipment of oxygen concentrators to India.
As the co-chair of the NYC chapter, I ask you to please consider donating $25 today.
Every human deserves the right to oxygen.