UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
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Explanatory Note
This amendment to Schedule 14A amends and restates the Dell Consolidated Special Committee Investor Presentation filed as definitive additional materials with the Securities and Exchange Commission on July 8, 2013 to include a non-GAAP financial measures reconciliation table as Appendix A and certain other technical revisions.
D E L L S P E C I A L C O M M I T T E E I N V E S T O R P R E S E N T A T I O N
July 2013
Presentation to Dell’s investors
Alex Mandl (Chairman), Former President, COO & CFO of AT&T
Laura Conigliaro, Retired Partner of Goldman Sachs Special Committee Janet Clark, EVP & CFO of Marathon Oil
Ken Duberstein, Chairman & CEO of The Duberstein Group
Debevoise & Plimpton LLP Legal counsel Morris, Nichols, Arsht & Tunnell LLP
J.P. Morgan Financial advisors Evercore Partners
Management Boston Consulting Group consultant
Proxy MacKenzie Partners solicitor
1
Agenda
Transaction process 3 Perspectives on Dell today 12 Overview of financial forecasts 22 Evaluation of strategic alternatives 30
| 2 |
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Process led by experienced and independent Special Committee
Alex Mandl
Chairman of Special Committee
Former President, COO & CFO of AT&T
Other experience
Chairman of Gemalto
President & CEO of Gemplus
Former director of Pfizer, Visteon Corp., Hewett Associates, AT&T, General Instrument Corp. and Warner Lambert
Laura Conigliaro
Director
Retired Partner of Goldman Sachs
Other experience
Co-Director of Goldman Sachs Americas Equity Research
Covered computer systems sector as Technology Equity Research business leader
Director of Infoblox, Arista Networks and Genpact
Janet Clark
Director
EVP & CFO of Marathon Oil
Other experience
SVP & CFO of Nuevo Energy
EVP of Santa Fe Snyder
Investment banker at The First Boston Corporation
Director of four nonprofit organizations
Ken Duberstein
Director
Chairman & CEO of The Duberstein Group
Other experience
Former White House Chief of Staff (Reagan)
Lead Director, The Boeing Company
Chairman, Governance Committee, The Travelers Companies
Former Presiding Director, ConocoPhillips
The Special Committee consists of independent directors with deep experience and functional expertise across the technology sector and M&A, advised by leading independent legal, financial and strategic advisors
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Independent directors unanimously approved transaction
James Breyer1
Director
Partner, Accel Partners
Other experience
McKinsey & Company
Product marketing and management at Apple Computers and Hewlett-Packard
Lead Independent Director, Wal-Mart Stores
Donald Carty
Director
Chairman, Virgin America
Other experience
Chairman & CEO of AMR and American Airlines
CEO of CP Air
National Infrastructure Advisory Council
Current Director of Barrack Gold Corp., Hawaiian Holdings and Porter Air
William Gray III2
Director
Chairman, Gray Global Strategies
Other experience
Co-Chairman GrayLoefferler, LLC
Chairman, The Amani Group
CEO, The College Fund / UNCF
Congressman, US House of Representatives, 1979-1991
Gerard Kleisterlee
Director
President & CEO, Royall Philips Electronics
Other experience
CEO, Philips’ Components Division
President, Philips Taiwan
MD, Philips Display Components
Member of Asia Business Council and Dutch Innovation Platform
Klaus Luft
Director
Founder, Artedona AG
Other experience
Owner & President, MATCH – Market Access Services
Vice Chairman & International Advisor, Goldman Sachs
CEO, Nixdorf Computer
Shantanu Narayen
Director
President & CEO, Adobe
Other experience
Key product research and development positions at Adobe
Co-founder, Pictra
Director of desktop and collaboration products at Silicon Graphics
Apple Computer
Ross Perot Jr.
Director
Chairman, Hillwood
Other experience
Founder, Perot Systems (acquired by Dell in 2009)
Chairman, Air Force Memorial Foundation
Chairman, Governor’s Task Force for Economic Growth
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James Breyer will not be seeking re-election as a director; 2 William Gray III deceased on July 1, 2013 |
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Going private delivers highest value for Dell’s shareholders
All cash offer at a significant, certain premium
Comprehensive range of alternatives evaluated
Shareholder friendly process and terms to ensure value was maximized
Shifts all business and transaction risks to buyer group
Avoids high risk of a levered recap and delivers superior value and certainty
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Transaction highlights
$13.65 per share in cash provides significant, immediate and certain premium
37% premium over 90 calendar day trading average and 25% premium over 1-day price1
Negotiations resulted in 6 price increases and $4 billion of additional value
Rigorous process including robust go-shop
In total, 21 strategic and 52 financial buyers participated
Blackstone and Carl Icahn submitted preliminary proposals during go-shop process
– Blackstone terminated participation after rigorous diligence process
– Icahn did not follow through on his preliminary proposal
Icahn and Southeastern submitted a letter on May 9th, and Icahn submitted a new letter on June 18th, each outlining alternative concepts
– On July 1st, Icahn provided a financing commitment letter but structure or remedies for failure to close for either alternative concept remain outstanding
All cash transaction at significant premium given high and growing risks
Increasingly negative trends in core PC markets
Enterprise segment depends on core PC business
Transformation faces execution and competitive challenges
Transaction transfers all risks and uncertainties of the business to the buyer group
1 Premiums based on unaffected price as of the last trading day (1/11/13) before rumors of a possible going-private transaction were first published
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Process was rigorous, objective and competitive
Rigorous review of strategic alternatives
Established favorable rules of engagement
Highly competitive process including robust go-shop
The Special Committee has met over 40 times since inception
Considered broad range of strategic and financial alternatives
Retained BCG to assist the Special Committee to evaluate strategic options
Michael Dell agreed to work in good faith with any bidder
Special Committee’s consent required for Michael Dell’s agreement with any bidder
Michael Dell agreed to vote at least pro rata for any superior proposal
Transaction requires approval by holders of a majority of the unaffiliated shares1
Prior to signing, 3 leading financial sponsors conducted due diligence but 2 declined to submit firm offers, citing challenges in PC business
Evercore retained as independent financial advisor to review process and run go-shop
Aggressive go-shop, 70 parties participated and 2 indications of interest submitted (Blackstone and Icahn)
Blackstone and Icahn provided access to management and diligence materials
Icahn and Southeastern submitted a letter on May 9th, and Icahn submitted a new letter on June 18th, each outlining alternative concepts
On July 1st, Icahn provided a financing commitment letter but structure or remedies for failure to close for either alternative concept remain outstanding
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Unaffiliated shares represent shares not held by Michael Dell, management and related entities |
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$4 billion in additional value created…
Progression of Silver Lake bids (offer price per share) and key events
Represents Silver Lake bids
10/23/12
Initial bids $12.16 (Sponsor B bids
$12.00—$13.00)
$11.22
8/20/12
Special Late Oct Committee BCG formed hired
$13.65 $13.60 $13.50 $13.25
$12.90 2/5/13 $12.70 Announces transaction at offer price of 5/13/13 7/1/13 $13.65 Special Committee Icahn provides a requests additional financing commitment information from Icahn / letter Southeastern
12/4/12
5/9/13 6/18/13
Sponsor B declines to Icahn / Southeastern Icahn submits bid submit letter outlining letter outlining recap concept tender offer concept
3/22/13
12/11-12/23/12 Active go-shop 4/18/13
Sponsor C enters 2/5/13 ends; Icahn and Blackstone process but Go-shop Blackstone submit drops out of declines to bid begins proposals process
Aug Sept Oct Nov Dec Jan Feb Mar Apr May Jun Jul ’13
Dell share 10/22/12 11/30/12 1/11/13 (Pre-initial bids) (Pre-GS report)1 (Unaffected)2 price: $9.59 $9.64 $10.88
| 1 |
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Represents day prior to Goldman Sachs Research report on possible Dell going-private transaction |
| 2 |
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Unaffected based on the last trading day before rumors of a possible going-private transaction were first published |
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… despite deteriorating financial outlook
Progression of FY14 Street consensus EPS estimates
Street consensus estimates
8/21/12 11/15/12 2/19/13 5/16/13 (Q2 FY13 earnings) (Q3 FY13 earnings) (Q4 FY13 earnings) (Q1 FY14 earnings)
$2.02 2/5/13
Transaction announced
$1.81
$1.79 $1.78
$1.67 $1.67
$1.66
$1.59 $1.57
$1.54
% ? since Aug 2012: (50%)
$1.00 $1.00 (Current estimate)
Aug Sept Oct Nov Dec Jan Feb Mar Apr May Jun Jul ’13
50% decrease in FY14 estimates since August 2012
Source: ThomsonOne; Current estimates as of 7/3/13
9
Attractive premium to trading multiple
$13.65/share represents 5.4x Final FY14 Board Case EBITDA
63% premium to next twelve months (“NTM”) EBITDA multiple on 1/11/13, prior to deal rumors
77% premium to average NTM EBITDA multiple since June 2012
Significantly exceeds Dell’s multiples over the last year
Enterprise value / next twelve months EBITDA1
Offer multiple
7.0x (Last quarter
annualized (LQA)
1Q FY14):
6.0x 6.7x2
Offer multiple
(Final FY14
Board Case):
5.0x 5.4x3
4.0x Dell
(Consensus
EBITDA):
3.3x4
3.0x Actual period
average:
3.0x
2.0x
Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13
Source: Company filings; FactSet for next twelve months (“NTM”) EBITDA
| 1 |
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Based on Street consensus estimates |
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Based on last quarter annualized 1Q FY14 EBITDA of $2,892mm |
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Based on Final FY14 Board Case EBITDA of $3,577mm |
4 Represents unaffected multiple based on the last trading day (1/11/13) before rumors of a possible going-private transaction were first published
10
Agenda
Transaction process 3 Perspectives on Dell today 12 Overview of financial forecasts 22 Evaluation of strategic alternatives 30
11
Transition to “New Dell” depends on “Core Dell” performance
Characteristics Dell strategy
End User Declining demand Continue cash Mitigate volatility Computing generation “Core Dell“1 Positive cash flow (Transactional) Global scale Global expansion
Strong brand
Fund & Pull-through
Enterprise Faster growth Outpace market Leverage footprint
Solutions growth
“New Dell“2 Expanding margins and Higher recurring Invest organically & Integrated offerings
(Solutions)
Services inorganically revenue
ą “Core Dell” includes mobility, desktops, thin client, third-party software and EUC-related peripherals as of Q1 FY14
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“New Dell” includes servers, networking, storage, ESG-related peripherals, services and software as of Q1 FY14 |
12
Services accounts for a majority of all segments
operating income
13
Source: Company filings (based on realigned global operating segments as of Q1 FY14)
1 Services includes a broad range of IT and business services, including support and deployment, infrastructure, cloud and security, and applications and business process; 2 EUC includes mobility, desktops, thin
client, third-party software and EUC-related peripherals; 3 ESG includes servers, networking, storage and ESG-related peripherals; 4 Software includes systems management, security and information
management
Services is largest driver of segments
operating income
~15% of segments revenue but over 55%
of segments operating margin
Large portion of Services is tied to
Support and Deployment
Represents ~57% of Services revenue
Headwinds in PC and Servers will impact
Support and Deployment
ESG and Software face integration and
other competitive risks
Commoditization in servers
Emerging player in software
Weak position in growth segments (e.g.,
Cloud, SaaS)
EUC margins continue to be under
pressure due to PC market fundamentals
Q1 FY14
Segments
revenue ($mm)
Q1 FY14
Segments
operating income ($mm)
Dell Q1 FY14 performance
Key observations / implications
Software4
ESG3
EUC2
Services1
Software4
ESG3
EUC2
Services1
$295
$3,093
$8,920
$2,109
$14,417
($85)
$136
$224
$370
$645
Support and Deployment – an important driver of Dell’s profitability
Support and Deployment is an attractive business
Primarily extended warranty, installation and configuration of PCs and servers
Support and Deployment is tied to unit sales in both EUC and ESG
In EUC, unit sales growth is under secular pressure
In ESG, growth of Cloud represents a challenge
Does drive unit sales (although at lower margins)
However, pressures Support and Deployment as Cloud providers typically manage equipment in-house with less appetite for external support
14
Returns for Dell’s acquisition program remain uncertain
Significant future integration and investment still required
Over $13bn spent on acquisitions since FY08 to transform Dell into a solutions-oriented business
Sales force integration benefits and cross-selling synergies taking longer to achieve
A number of acquisitions have required additional investments to reposition for growth or new business opportunities
Current returns are lagging the 15% IRR target by the Company due, in part, to required additional investments
As the environment continues to evolve rapidly, additional investments and acquisitions are likely to be required to complete the transformation
15
“New Dell” faces integration and competitive risks
Key observations
Modest revenue contribution from acquisitions despite $13bn1 spend
Remains emerging player in software and services with ~1% share
Weak position in key growth segments: Cloud, SaaS
Risk of commoditization and profit erosion in x86 servers, partly driven by multiple threats from Cloud
Scale of R&D less than competitors
Storage segment share
Others
Dell 16.4%
7.2% EMC
33.4%
HP
8.8%
Hitachi
Data IBM
Systems NetApp 13.3%
9.6% 11.3%
(Gartner: 2012)
R&D / % of sales2
($ in millions)
$6,302
$5,488
$4,523
12% 14%
$3,399 12% 12%
$2,560
5%3 6%
$1,072 3% $904
2%
Dell HPQ IBM ORCL EMC NTAP CSCO
Networking segment share
Others
Dell 17.2%
1.9% Cisco
Huawei 62.3%
2.0%
Brocade
2.1%
Juniper
2.6%
Alcatel-
Lucent
2.9% HP
9.1%
(IDC: 2012)
Server (x86) segment share
Others
Oracle 16.4% HP
3.0% 34.3%
Fujitsu
3.6%
Cisco
4.5%
Dell
IBM 22.2%
16.0%
(IDC: 2012)
Source: Company filings, FactSet, Gartner, IDC
Note: “New Dell” includes servers, networking, storage, ESG-related peripherals, services and software as of Q1 FY14
1 Acquisitions include AppAssure, Boomi, Clerity, Compellent, DFS Canada, EqualLogic, Exanet, Force10, InSiteOne, Kace, Make, Ocarina, Perot, Quest, RNA Networks, Scalent, SecureWorks, SonicWALL and Wyse
| 2 |
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Based on latest reported fiscal year |
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Dell R&D for ESG is ~5% of ESG sales 16 |
Recent industry research forecasts continued PC deterioration
PC market outlook continues to show a secular decline
On June 28, 2013, Morgan Stanley lowered its 2013 PC unit forecast from -5% to -10%
“…the lack of catalyst until C4Q will likely drive disappointing near term results”
“Our tablet unit growth rate of 55% in 2013 is unchanged from our prior estimate”
38% decrease in IDC ‘16E shipment forecasts since June 2012 2012-16E
550 CAGR
8.4%
500
(mm) 7.4%
nts
450
shipme 4.3%
2005-11A CAGR
ldwide 400 Historical: 9.7%
1.7%
Wor 350 PCs
(~1.5%)2
Other sources: 2012-16E CAGR IDC estimates
300 Gartner (Jun ‘13): 0.5% Jun ‘12
Morgan Stanley1 (Jun ‘13): (5.3%) Sep ‘12
Dec ‘12
Barclays (Mar ‘13): (6.7%) Mar ‘13
250 Jun ‘13
‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16
PC shipments declined 13% YoY in Q1 2013, the largest drop in ~20 years3
Source: IDC, Gartner, Morgan Stanley, Barclays
| 1 |
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Represents 2012-15E CAGR |
| 2 |
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Based on preliminary IDC estimates |
| 3 |
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Based on IDC data |
17
PC profit pools shifting to segments where Dell is weak
Tablets expected to continue to cannibalize PC profit pools1
FY12 FY17 ~(7%) CAGR
Dell PCs: $38bn $26bn
strength
~30% CAGR
Dell Tablets: $8bn $30bn
weakness
PC profit pools shifting to lower margin value segment1
FY12 FY17
~(9%) CAGR
Dell Std / Prem: $34bn $21bn
strength
Dell ~4% CAGR
weakness Value: $4bn $5bn
Total profit pool = $38bn Total profit pool = $26bn
Dell’s build-to-order model less suited for value segments
Source: BCG
Note: Represents Dell’s fiscal years
1 Profit pool represents weighted average gross profit for each segment multiplied by the total units sold in each segment (Premium: $800+; Standard: $500-$799; Value: <$500)
18
“Core Dell” and “New Dell” closely linked
“Core Dell” is critical to the transformation of “New Dell”
Revenue absorbs significant overhead ($38bn1 in “Core Dell” revenue)
Provides procurement scale
“Core Dell” drives “New Dell” as a majority of Support and Deployment, a highly profitable cash flow stream, relies on the sale of PCs
Cash flow has fueled “New Dell” acquisitions
“New Dell” business faces risks
Product integration into solutions is in very early stages
Sales force integration is limited to date
– Largest customers are either “Core Dell” or “New Dell” customers with limited cross-selling
Cloud represents a substantial threat
The speed of transformation is critical
“Core Dell,” including attached Support and Deployment, represents a substantial majority of operating income, which is projected by BCG to decline between 8-15% per year
“New Dell” operating income is projected by BCG to grow 5-8% per year
Dell’s rate of transformation is being outpaced by the rapid market shift to Cloud
Source: BCG 19
¹ Includes desktop, mobility and third-party software and peripherals revenue in FY13
PC exposure will likely continue to weigh on Dell’s share price, regardless of the Enterprise trajectory
PC revenue1 ($bn) and next twelve months P/E since 1/11/08
$40 $30 $20 $10
$37
Dell’s NTM P/E multiple peaked at 15.4x in June ‘08
Dell PC revenue1 Dell NTM P/E multiple
20.0x
15.0x
10.0x
5.0x
0.0x
FY08
FY13
Source: Company filings; FactSet
Note: Market data from 1/11/08 to 1/11/13
1 PC revenue includes desktops and notebooks
2 Unaffected multiple shown at stock price of $10.88 as of 1/11/13 before transaction rumors
Prior to announcement, Dell’s unaffected NTM P/E multiple was 6.6x2, a decline of 57% from its peak in June ‘08
20
Agenda
Transaction process 3
Perspectives on Dell today 12
Evolution of financial forecasts 22
Evaluation of strategic alternatives 30
21
Free cash flow
(43%)
% mgn: 8.4% 5.2%
Continued deterioration of Dell’s financial performance
22
Key metrics ($ in billions, except per share data)
Revenue
(8%)
Non-GAAP operating income1
(28%)
% mgn: 8.2% 6.4%
Source: Company filings
<SUP>1</SUP> To highlight significant changes period over period, this presentation excludes benefits of $70 million and $320 million for FY12 and FY13, respectively, which primarily relate to vendor settlements, as
well as other items. See Appendix A for more detail
2 Based on $0.2bn net interest expense, 21% tax rate and 1,740mm weighted average shares outstanding
Final FY14 Board Case
LQA 1Q FY14
Final FY14 Board Case
LQA 1Q FY14
Non-GAAP EPS - diluted1
(25%)
Final FY14 Board Case2
LQA 1Q FY14
Forecasting has been poor in a challenging environment
23
Source: Company filings; Dell management plan
1 Excludes severance and facility actions and acquisition-related costs, amortization of intangible assets, and for Q1 FY14, costs related to Dell’s proposed merger, which consist of transaction expenses as well as
expenses associated with special performance-based retention cash awards granted to certain key employees. In addition, the aggregate tax impact of the above items has been excluded from non-GAAP EPS
2 In addition, to highlight significant changes period over period, this presentation excludes benefits, which primarily relate to vendor settlements of approximately $320 million and $70 million for FY13 and FY12, as
well as other items. See Appendix A for more detail
2
Quarterly revenue and EPS performance
Revenue: Dell has missed 7 out of the last 9 quarters vs. Board plan
EPS: Dell has missed 4 of the last 5 quarters vs. Board plan
Revenue
Non-GAAP
EPS – diluted1
2
2
Internal forecasts have been steadily revised downwards
$2.27
$2.50
1.70
1.84
1.59
$5.2
$63.0
$5.6
$66.0
4.2
59.9
4.0
57.5
3.7
(7%)
(12%)
(14%)
~2 mo.
~4 mo.
(9%)
(25%)
(26%)
(9%)
(23%)
(25%)
56.0
3 weeks after approving plan, Dell significantly
missed Q2 and revised EPS guidance down 25%
(14%)
(46%)
(50%)
Cumulative change since July 2012:
~8 mo.
1.58
3.7
(1%)
(9% )
(7%)
56.9
FY13 Actual<SUP>1</SUP>
3.0
1%
(19%)
(21%)
~2 mo.
56.5
1.253
FY14 ($bn, except per share data)
Non-GAAP
EPS – diluted1,2
Non-GAAP
op. inc.1,2
Revenue
Non-GAAP
EPS – diluted1,2
Non-GAAP
op. inc.1,2
Revenue
FY13 ($bn, except per share data)
Time
frame
Scenario
Source: Company filings; Dell management for plan
<SUP>1</SUP> To highlight significant changes period over period, this presentation excludes benefits of approximately $320 million for FY13, which primarily relate to vendor settlements, as well as other items. See
Appendix A for more detail
2 Dell cannot provide GAAP to non-GAAP reconciliations for projected financial information. See Appendix A for more detail on the uses and limitations of non-GAAP financial measures
3 Based on $0.2bn net interest expense, 21% tax rate and 1,740mm weighted average shares outstanding
24
(10%)
(30%)
(31%)
July Plan
9/21 Case
Preliminary FY14 Board Case
(1/18/13)
Final FY14 Board Case
(3/13/13)
BCG retained to evaluate business and options
During the fall of 2012, the Special Committee sought input from BCG to independently assess risks and opportunities
Full access to Dell senior management team and Company information
Scope of BCG work included:
Future of the PC business
Prospects for Dell’s transformation
Strategy of each business segment
Financial cases to model various sensitivities around management’s aspirational cost savings target of $3.3bn1
– Two cost savings realization cases evaluated that translated to 25% and 75% of the aspirational $3.3bn
– Categories of costs have been identified for 25% case but not 75% case
– Savings assumed phased in over 3 years
Source: BCG
| 1 |
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Based on Dell management’s estimated cost savings by FY16 for its fully implemented productivity cost takeout |
25
BCG validated business performance challenges
Market shift to value segments / tablets, where Dell has limited presence
Slow enterprise transformation with acquisitions performing below expectations
BCG created a “base case” forecast for Dell, grounded in external market dynamics
?Combined market revenue of PCs and tablets growing at 4% per year
Tablets growing rapidly and market shifting from premium to value PCs
Other Dell business segments growing organically in line with the market
Lower revenue and operating income relative to management forecast
BCG identified opportunities for 25% Case
Organizational de-layering
Simplification and labor and transport savings from building-to-stock
Market performance tracking BCG’s expectations, but no net cost reduction opportunities have been realized
Source: BCG
26
BCG 25% Case
BCG "75% Case" is based on an aspirational cost savings target,
not concrete initiatives
Source: Dell management estimates, BCG estimates, Wall Street estimates as of 7/3/13
1 Q1 FY14 non-GAAP operating income of $590 million, annualized. See Appendix A for more detail
2 Based on Dell’s Q1 FY14 consolidated operating margin
Forecasted operating income ($ in billions)
Implies an unrealistic
consolidated
operating margin of
10% vs. 4% today2
BCG evaluated the impact if
management achieved 75% of
the aspirational cost savings of
$3.3bn
Many of the categories of cost
savings were not specifically
identified
Significant portion of any cost
savings will need to be
reinvested in the business /
would not drop to the bottom
line
BCG 75% Case FY15 forecast is
~50% higher than current Street
consensus
Commentary
27
Given aggressive margin expansion assumptions, the BCG 75% Case
was deemed by the Special Committee to be aspirational at best
$3.0
$2.4
BCG Base Case
Margin pressure trend continues in Q1 FY14
28
Source: Dell management, FactSet
Note: Dell fiscal year ended January
1 See Non-GAAP reconciliations in Appendix A for more detail
2 Free cash flow defined as cash flow from operations less capital expenditures less change in financing receivables
Non-GAAP Q1 FY14 results ($ in billions, except per share data)
Key observations
Revenue above Street
consensus
ESG revenue up 10% YoY
BRIC and China revenue
down 17% and 24% YoY,
respectively
Gross margin percentage at
lowest point since Q3 FY11
Trailing 12 months free cash
flow down 35% YoY
2
1
1
1
Agenda
Transaction process 3
Perspectives on Dell today 12
Evolution of financial forecasts 22
Evaluation of strategic alternatives 30
29
Full range of strategic alternatives considered
Benefits Challenges
Levered—Significantly elevates risk given business
+ Delivers upfront cash to recap outlook (special shareholders dividend or—Weak public equity story and limited strategic buyback) + Provides opportunity to share upside capital flexibility d ution distrib Regular + Utilize cash flow to increase—Constrained recurring domestic cash flow
Enhance dividend dividend increase—Diminishing marginal returns with yield
+ Dividend payers rewarded by market increases
+ Remove revenue and margin—Significant dis-synergies, especially with volatility Support and Deployment, and disruption to EUC + Improve financial stability remaining segments
+ Eliminate long-term secular pressure—Limited cash flow to finance “New Dell” growth paration from PC industry—Significant time required and high complexity Se + Potentially unlocks leverage
- Potential competitive disadvantage to capacity for remaining businesses DFS domestic OEM’s
+ Ability to focus on core business
- Significant time required and high complexity vs. financing
30
Full range of strategic alternatives considered (cont’d)
Benefits Challenges
+Grow Enterprise, Software, and—Limited number of targets of Services businesses in targeted scale at reasonable valuations
Transform- areas ative
acquisitions High interloper risk for key
+Opportunity to improve growth -and margin profile assets
- Transaction size likely a
+Immediate value creation deterrent
Sale to
- Views validated by fact that no
strategic
+De-risks standalone plan strategic buyer put forth a proposal
We thoroughly evaluated all strategic alternatives and determined the $13.65 transaction is the most attractive alternative
31
Summary of Icahn June 18th /July1 st letter
Overview of Icahn June 18th / July 1st letter Key unanswered questions
Icahn asks that Dell commence a self-tender for Counterparty and commitment letter for proposed $14.00 per share, prorated for capped available cash receivables proceeds
Implies ~$10.00 in cash per share (~72%) if all shares tender except Icahn and Southeastern1
Icahn and Southeastern will not tender their shares Arrangements to provide necessary working capital and liquidity post closing
Icahn purchased ~72mm shares from
Southeastern (~50% of shares owned) at $13.52 per share
Together, they still own ~13%1 of total shares
Management team and operating plan
Total net funding of $15.6bn
$7.5bn Dell cash
$2.9bn net financing receivables proceeds Draft agreement not to tender shares (uncommitted)
$5.2bn secured term loan
To elect a slate of directors at the next annual Icahn / Southeastern shareholder agreement meeting to implement proposed tender offer2
1 Southeastern sold 0.6mm additional shares since it sold ~72mm shares to Icahn on 6/18/13, which would now result in ~71% of all shares tendered, except Icahn and Southeastern; Icahn and Southeastern would now have a combined ownership of ~12%
2 Icahn’s nominations include Jonathan Christodoro, Harry Debes, Carl Icahn, Gary Meyers, Daniel Ninivaggi and Rajendra Singh; Southeastern’s nominations include Matthew Jones, Bernard Lanigan, Jr.,
Rahul Merchant, Peter van Oppen, Howard Silver and David Willmott 32
32
Leveraged recap considerations
Elevated risks due to leverage Poor public-market equity story
Elevates Dell’s risk profile Highly levered
FY14E operating income has declined 46% since the July
Plan Deteriorating cash flow metrics
Potential adverse employee, vendor and customer perception
Few precedents – particularly in
Significantly weaker financial technology profile than key enterprise peers
Weak financial position to Reduced float complete transformation
Dell will remain largely a PC company (~2/3 of revenues) Value uncertainty
Dramatically elevated risk profile and uncertainty for existing Dell shareholders
33
Highly leveraged recap with weak stub does not create value
June 18th / July 1st Icahn letter
Total cash available for tender ($bn) $15.6 Leverage may impair competitive position
vs. strongly capitalized peers: HP, EMC,
Cash available per share, assuming Icahn and IBM, Cisco
| 1 |
|
$9.94 Southeastern do not tender shares |
No public large-cap technology
Stub equity value per share required to break-even2 $12.79 companies attempt to operate at these
leverage levels
Break-even EV / EBITDA multiples for $13.65 aggregate value Poor public-market equity story unlikely to
Final FY14 Board case3 4.5x support $13.65 blended value
Few precedents
LQA Q1 FY144 5.7x
None in tech sector – for a reason Memo: Consensus Dell unaffected 5 3.3x Clear Channel has declined over (70%)
Pro forma leverage Gross debt primary metric due to high 6 required minimum cash
Gross debt / Final FY14 Board Case EBITDA 3.0x
Gross leverage will be nearly identical to
Gross debt / LQA Q1 FY14 EBITDA 6 3.9x Dell’s EBITDA trading multiple prior to
transaction
Unrealistic multiple expansion required to achieve $13.65 future value parity
| 1 |
|
Cash available per share calculated assuming 1,566mm shares elect to receive cash tender |
2 Break-even value per share calculated to provide $13.65 value to shareholders, including partial cash tender distribution and residual equity value
| 3 |
|
Final FY14 Board Case EBITDA of $3,254mm, pro forma for loss of DFS income of $323mm |
| 4 |
|
LQA Q1 FY14 EBITDA of $2,569mm, pro forma for loss of DFS income of $323mm |
| 5 |
|
Unaffected multiples shown at stock price of $10.88 as of 1/11/13 before transaction rumors 34 |
6 Final FY14 Board Case EBITDA and LQA Q1 FY14 EBITDA exclude $373mm and $284mm of stock based compensation, respectively
34
Icahn and Southeastern concepts lack credibility
Icahn has been inconsistent about per share cash to shareholders and aggregate cash proceeds
March 22nd letter: $15.00 per share cash election merger ($15.65bn cap / ~58% of shares)
May 9th letter: $12.00 per share cash election distribution ($17.3bn assumed limit / 80% of shares)
June 18th letter: $14.00 per share self-tender offer ($15.6bn cap / ~62% of shares)
To match $13.65 in cash, each of these alternatives depends on a public stub trading at an unrealistic expanded valuation multiple, in the face of declining performance and heightened leverage / risk
Icahn has failed to provide most of the key provisions and mechanics of the May 9th or June 18th letter, as requested by the Special Committee
Southeastern has openly opposed a transaction for $13.65, but then sold 72mm shares (~50% of shares owned) to Icahn for $13.52 per share
On February 8th, Southeastern publicized an analysis claiming that Dell is worth almost $24.00 per share
How can their rhetoric and actions be reconciled?
The Special Committee stands ready to negotiate any proposal that is actionable and potentially superior, but Icahn and Southeastern positions have been inconsistent and their alternative concepts incomplete
35
Clear Channel highlights risks of levered stub equity
Highfields, holder of a 5% stake in Clear Channel, opposed initial offers of $37.60/share and $39.00/share from Bain Capital and Thomas H. Lee Partners, which had no equity stub component
In response to dissident shareholders, Clear Channel offered a public equity stub as part of the transaction (~5%)
Transaction completed at $36.00 (PF leverage of ~9x) and stock has declined ~75% since then
Stock price performance of outstanding stub ($) $45
Clear Channel Communications / CC Media Holdings S&P 500
14%
7/30/08: The acquisition of Clear Offer price: Channel closes ($35.98) $36.00 $30
1/29/07: Clear Channel discloses the proposed acquisition by Bain Capital $15 and T.H. Lee Partners for $37.60
(75%)
$0
1/1/07 4/20/08 8/8/09 11/26/10 3/15/12 7/3/13
Similarities to Dell transaction
Founder / sponsor deal
Declining growth and negative industry trends
Leverage levels significantly above peers following transaction
Small float and lower liquidity for the stub
Source: Company filings, FactSet, SharkRepellent; Note: CC Media Holdings share price adjusted to Clear Channel basis 36
36
Dramatic underperformance for voted down transactions
Target stock price performance for voted down transactions (2005—2012)
Price performance following date voted
Announce Voted down vs. unaffected
Target Acquirer Declining shareholders date down date LBO 1-year 2-year ISS rec.
TGC Industries Dawson Geophysical TGC Industries 03/21/11 10/28/11 10.7% NA For
Dynegy Blackstone Dynegy 08/13/10 11/23/10 3 (13.7%) (90.0%) For
VaxGen OXiGENE VaxGen 10/15/09 02/12/10 (42.9%) (58.6%) NA
Cablevision Systems Charles and James Dolan Cablevision Systems 05/02/07 10/24/07 3 (54.7%) (28.1%) Against
Randolph Bank & Trust Bank of the Carolinas Randolph Bank & Trust 04/12/07 11/14/07 (13.3%) (61.3%) For
Lear American Real Estate Partners Lear 02/05/07 07/16/07 3 (60.3%) (99.0%) Against
Eddie Bauer Holdings Sun Capital and Golden Gate Capital Eddie Bauer Holdings 11/13/06 02/09/07 3 (27.2%) (92.1%) For
Cornell Companies Veritas Capital Cornell Companies 10/09/06 01/23/07 3 21.5% (21.8%) Against
Corning Natural Gas C&T Enterprises Corning Natural Gas 05/11/06 10/17/06 22.9% 18.0% For
Mean (17.4%) (54.1%)
Median (13.7%) (59.9%)
Average 1-year and 2-year declines of 17% and 54%, respectively
Source: FactSet, ISS
Note: Includes transactions 2005 – 2012, U.S. target only
37
Substantial downside risk to Dell shareholders if transaction rejected
$13.65 represents substantial premium to implied Dell share prices using current HP P/E multiples
Assuming HP’s CY13E P/E1
$13.65 57% premium 96% premium 132% premium
$8.72
$6.95
$5.88
Silver Lake / Final FY14 Wall Street LQA Michael Dell Board Case Consensus Q1 FY14
EPS: $1.25 $1.00 $0.84
Source: Company filings, FactSet; Market data as of 7/3/13
| 1 |
|
Assumes HP’s CY13E P/E multiple of 7.0x 38 |
38
Conclusion: transaction delivers highest value for shareholders
All cash offer at a significant, certain premium
Comprehensive range of alternatives evaluated
Shareholder friendly process and terms to ensure value was maximized
Highest price available following exhaustive process
Shifts all business and transaction risks to buyer group
Avoids high risk of a levered recap and delivers superior value and certainty
39
Agenda
Transaction process
Perspectives on Dell today
Evolution of financial forecasts
22
3
12
Evaluation of strategic alternatives
30
40
Appendix
41
Appendix A: Reconciliation to non-GAAP financials
41
Reconciliation to non-GAAP financials – FY12 and FY13
1 In order to highlight significant changes period over period, this presentation excludes benefits, which primarily relate to vendor settlements, of $70 million and $320 million for FY12 and FY13, respectively
2 For FY12, the EPS impact of vendor settlements is calculated using an assumed tax rate of 20.1% and a diluted weighted average shares outstanding of 1,853. For FY13, the EPS impact of vendor settlements is
calculated using an assumed tax rate of 20.6% and a diluted weighted average shares outstanding of 1,755
1, 2
1
Appendix A: Reconciliation to non-GAAP financials (cont’d)
42
Reconciliation to non-GAAP financials – Q1 FY13 and Q1 FY14
1 Includes merger-related costs, which consist of transaction expenses associated with Dell’s proposed merger as well as expenses associated with special performance-based retention cash awards granted to certain key
employees in Q1 FY14
Appendix A: Reconciliation to non-GAAP financials (cont’d)
43
There are limitations to the use of the non-GAAP financial measures presented in this presentation. Dell’s non-GAAP
financial measures may not be comparable to similarly titled measures of other companies. Other companies, including
companies in Dell’s industry, may calculate the non-GAAP financial measures differently than Dell, limiting the
usefulness of those measures for comparative purposes. In addition, items such as amortization of purchased
intangible assets represent the loss in value of intangible assets over time. The expense associated with this loss in
value is not included in the non-GAAP financial measures and such measures, therefore, do not reflect the full
economic effect of such loss. Further, items such as severance and facility actions, acquisition-related costs, and other
charges that are excluded from the non-GAAP financial measures can have a material impact on earnings. Dell’s
management compensates for the foregoing limitations by relying primarily on GAAP results and using non-GAAP
financial measures supplementally or for projections when comparable GAAP financial measures are not available. The
non-GAAP financial measures are not meant to be considered as indicators of performance in isolation from or as a
substitute for gross margin, operating expenses, operating income, net income, and earnings per share prepared in
accordance with GAAP, and should be read only in conjunction with financial information presented on a GAAP basis.
See above for reconciliations of each non-GAAP financial measure to its most directly comparable GAAP financial
measure. We encourage you to review the reconciliations presented above in conjunction with the presentation of the
non-GAAP financial measures for each of the periods presented.
Appendix A: Reconciliation to non-GAAP financials (cont’d)
44
The following is a summary of the costs and other items excluded from the most comparable GAAP financial measures
to calculate non-GAAP financial measures:
• Severance and Facility Actions and Acquisition-related Costs - Severance and facility action costs are primarily
related to facilities charges, including accelerated depreciation and severance and benefits for employees terminated
pursuant to cost synergies related to strategic acquisitions and actions taken as part of a comprehensive review of
costs. Acquisition-related charges are expensed as incurred and consist primarily of retention payments, integration
costs, and other costs. Retention payments include stock-based compensation and cash incentives awarded to
employees, which are recognized over the vesting period. Integration costs primarily include IT costs related to the
integration of IT systems and processes, costs related to the integration of employees, consulting expenses, and for
acquisitions made prior to Fiscal 2013, costs related to full-time employees who were working on the integration.
Severance and facility actions and acquisition-related charges are inconsistent in amount and are significantly
impacted by the timing and nature of these events. Therefore, although Dell may incur these types of expenses in the
future, it believes that eliminating these charges for purposes of calculating the non-GAAP financial measures
presented above facilitates a more meaningful evaluation of Dell’s current operating performance and comparisons to
Dell’s past operating performance.
• Amortization of Intangible Assets - Amortization of purchased intangible assets consists primarily of amortization of
customer relationships, acquired technology, non-compete covenants, and trade names purchased in connection with
business acquisitions. Dell incurs charges related to the amortization of these intangibles, and those charges are
included in Dell’s Consolidated Financial Statements. Amortization charges for purchased intangible assets are
significantly impacted by the timing and magnitude of Dell’s acquisitions. Accordingly, these charges may vary in
amount from period to period. Dell excludes these charges for purposes of calculating the non-GAAP financial
measures presented above to facilitate a more meaningful evaluation of Dell’s current operating performance and
comparisons to Dell’s past operating performance.
Appendix A: Reconciliation to non-GAAP financials (cont’d)
45
• Other Items - Dell also adjusts GAAP financial results for expenses associated with Dell’s proposed merger. These
expenses consist of professional fees incurred by Dell in connection with Dell’s proposed merger as well as the
reimbursement of transaction-related expenses incurred by certain participants approved by a special committee of the
Board of Directors. In addition, Dell adjusts GAAP financial results for special retention cash bonus awards granted to
certain key employees in the first quarter of Fiscal 2014 that will be payable in March 2014. Dell is excluding these
expenses for the purpose of calculating the non-GAAP financial measures presented above because Dell believes
these items are outside our ordinary course of business and do not contribute to a meaningful evaluation of Dell’s
current operating performance or comparisons to Dell’s past operating performance. In addition, to highlight significant
changes period over period, previously disclosed non-GAAP financial measures have been further adjusted to exclude
certain vendor settlements.
• The aggregate adjustment for income taxes is the estimated combined income tax effect for the adjustments
mentioned above. The tax effects are determined based on the tax jurisdictions where the above items were incurred.
• The financial projections and forecasts included non-GAAP financial measures, which were presented because Dell
believed they could be useful indicators of the Company’s projected future operating performance and cash flow. The
Company prepares its financial projections on a non-GAAP basis. The Company has not included in these materials a
reconciliation of its projected non-GAAP operating income or non-GAAP EPS, respectively, because information is not
available to the Company’s management to identify or reasonably estimate future severance and facility actions, future
acquisition-related costs, future acquisition-related tax adjustments, or future merger-related costs, each of which is
excluded from the non-GAAP financial measures. The calculation of the excluded items would require information
about the number, size, nature and timing of any future acquisitions by the Company, as well as purchase accounting
adjustments related to such acquisitions. In addition, the projection of expenses associated with Dell’s proposed
merger would require information about the likelihood of the merger and the number of participants involved, which
cannot be reasonably predicted. Because of the contingent nature of the exclusions, and because the acquisitions on
which the exclusions are dependent have not occurred and cannot reasonably be predicted, the specific adjustments
cannot be forecast with accuracy. The financial projections and forecasts included in these materials should not be
considered in isolation or in lieu of the Company’s operating and other financial information determined in accordance
with GAAP.
Forward-looking statements
Any statements in these materials about prospective performance and plans for the Company, the expected timing of the completion of the proposed merger and the ability to complete the proposed merger, and other statements containing the words “estimates,” “believes,” “anticipates,” “plans,” “expects,” “will,” and similar expressions, other than historical facts, constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Factors or risks that could cause our actual results to differ materially from the results we anticipate include, but are not limited to: (1) the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement; (2) the inability to complete the proposed merger due to the failure to obtain stockholder approval for the proposed merger or the failure to satisfy other conditions to completion of the proposed merger, including that a governmental entity may prohibit, delay or refuse to grant approval for the consummation of the transaction; (3) the failure to obtain the necessary financing arrangements set forth in the debt and equity commitment letters delivered pursuant to the merger agreement; (4) risks related to disruption of management’s attention from the Company’s ongoing business operations due to the transaction; and (5) the effect of the announcement of the proposed merger on the Company’s relationships with its customers, operating results and business generally.
Actual results may differ materially from those indicated by such forward-looking statements. In addition, the forward-looking statements included in these materials represent our views as of the date hereof. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date hereof. Additional factors that may cause results to differ materially from those described in the forward-looking statements are set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended February 1, 2013, which was filed with the SEC on March 12, 2013, under the heading “Item 1A—Risk Factors,” and in subsequent reports on Forms
10-Q and 8-K filed with the SEC by the Company.
46
Additional information and where to find It
In connection with the proposed merger transaction, the Company filed with the SEC a definitive proxy statement and other relevant documents, including a form of proxy card, on May 31, 2013. The definitive proxy statement and a form of proxy have been mailed to the Company’s stockholders. Stockholders are urged to read the proxy statement and any other documents filed with the SEC in connection with the proposed merger or incorporated by reference in the proxy statement because they contain important information about the proposed merger.
Investors will be able to obtain a free copy of documents filed with the SEC at the SEC’s website at http://www.sec.gov. In addition, investors may obtain a free copy of the Company’s filings with the SEC from the Company’s website at http://content.dell.com/us/en/corp/investor-financial-reporting.aspx or by directing a request to: Dell Inc. One Dell Way, Round Rock, Texas 78682, Attn: Investor Relations, (512) 728-7800, investor_relations@dell.com.
The Company and its directors, executive officers and certain other members of management and employees of the Company may be deemed “participants” in the solicitation of proxies from stockholders of the Company in favor of the proposed merger. Information regarding the persons who may, under the rules of the SEC, be considered participants in the solicitation of the stockholders of the Company in connection with the proposed merger, and their direct or indirect interests, by security holdings or otherwise, which may be different from those of the Company’s stockholders generally, is set forth in the definitive proxy statement and the other relevant documents filed with the SEC. You can find information about the Company’s executive officers and directors in its Annual Report on Form 10-K for the fiscal year ended February 1, 2013 (as amended with the filing of a Form 10-K/A on June 3, 2013 containing Part III information) and in its definitive proxy statement filed with the SEC on Schedule 14A on May 24, 2012.
47