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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
June 2013
Presentation to Dell’s investors
Special Committee
Legal counsel
Financial advisors
Management consultant
Proxy solicitor
Alex Mandl (Chairman), Former President, COO & CFO of AT&T Laura Conigliaro, Retired Partner of Goldman Sachs Janet Clark, EVP & CFO of Marathon Oil Ken Duberstein, Chairman & CEO of The Duberstein Group
Debevoise & Plimpton LLP
Morris, Nichols, Arsht & Tunnell LLP
J.P. Morgan
Evercore Partners
Boston Consulting Group
MacKenzie Partners
1
Agenda
Transaction process 3
Perspectives on Dell today 13
Overview of financial forecasts 21
Evaluation of strategic alternatives 29
2
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
3
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 III
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
1 James Breyer will not be seeking re-election as a director
4
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
5
$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 outlining an alternative transaction
– Icahn and Southeastern have not provided requested details on financing terms, structure or remedies for failure to close
n All cash transaction at significant premium given high and growing risks
n Increasingly negative trends in core PC markets
n 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
6
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 outlining an alternative transaction
1 Unaffiliated shares represent shares not held by Michael Dell, management and related entities
7
$4 billion in additional value created…
Progression of Silver Lake bids (offer price per share) and key events
Represents Silver Lake bids
8/20/12
Special Committee formed
10/23/12
Initial bids (Sponsor B bids $12.00—$13.00)
$12.16
$11.22
Late Oct
BCG hired
12/11-12/23/12
Sponsor C enters process but declines to bid
$12.70
12/4/12
Sponsor B declines to bid
2/5/13
Go-shop begins
$12.90
$13.25
$13.60 $13.65 $13.50
2/5/13
Announces transaction at offer price of $13.65
3/22/13
Active go-shop ends; Icahn and Blackstone submit proposals
4/18/13
Blackstone drops out of process
5/13/13
Special Committee requests additional information from Icahn / Southeastern
5/9/13
Icahn / Southeastern submit letter outlining recap
Aug Sept Oct Nov Dec Jan Feb Mar Apr May June ’13
Dell share price:
10/22/12 (Pre-initial bids) $9.59
11/30/12 (Pre-GS report)1 $9.64
1/11/13 (Unaffected)2 $10.88
1 Represents day prior to Goldman Sachs Research report on possible Dell going-private transaction
2 Unaffected based on the last trading day before rumors of a possible going-private transaction were first published
8
… despite deteriorating financial outlook
Progression of FY14 Street consensus EPS estimates
8/21/12 (Q2 FY13 earnings)
11/15/12 (Q3 FY13 earnings)
2/19/13 (Q4 FY13 earnings)
Street consensus estimates
5/16/13 (Q1 FY14 earnings)
$2.02
$1.81
$1.79
$1.78
$1.67
$1.67
$1.66
2/5/13
Transaction announced
$1.59
$1.57
$1.54
% since Aug 2012: (50%)
$1.00 (Current estimate)
Aug Sept Oct Nov Dec Jan Feb Mar Apr May (Current) June ’13
50% decrease in FY14 estimates since August 2012
Source: ThomsonOne; Current estimates as of 6/3/13
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
7.0x 6.0x 5.0x 4.0x 3.0x 2.0x
Jun-12 Jul-12 Aug-12 Oct-12 Nov-12 Jan-13
Offer multiple (Last quarter annualized (LQA)
1Q FY14): 6.7x2
Offer multiple (Final FY14 Board Case): 5.4x3
Dell (Consensus EBITDA): 3.3x4 Actual period average: 3.0x
Source: Company filings; FactSet for next twelve months (“NTM”) EBITDA
1 Based on Street consensus estimates
2 Based on last quarter annualized 1Q FY14 EBITDA of $2,892mm
3 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
Terms protect and maximize shareholder value
Robust go-shop
“Majority of the unaffiliated” provision
Michael Dell’s neutrality
Special Committee flexibility
No financing condition with specific performance
Active 45-day “go-shop” period, on very pro-bidder terms, to actively solicit, evaluate and enter into negotiations with parties offering alternative proposals Go-shop produced preliminary proposals from Blackstone and Icahn
Blackstone terminated participation on April 18th
Icahn did not follow through on his preliminary proposal
Icahn and Southeastern submitted a letter on May 9th outlining an alternative transaction and have not provided requested details on financing terms, structure or remedies for failure to close
Transaction requires approval by holders of a majority of the outstanding shares not held by Michael Dell, management and related entities
Agreement by Michael Dell to work in good faith with any competing bidder
Agreement by Michael Dell to vote at least pro rata for any superior proposal
Special Committee can change its recommendation in favor of the merger to respond to intervening events other than a superior proposal Special Committee can terminate agreement in favor of a superior proposal
Silver Lake and Michael Dell obligated to consummate the transaction
11
Agenda
Transaction process 3
Perspectives on Dell today 13
Overview of financial forecasts 21
Evaluation of strategic alternatives 29
12
Transition to “New Dell” depends on “Core Dell” performance
“Core Dell“1 (Transactional)
End User Declining demand Computing Positive cash flow
Global scale
Strong brand
Characteristics
Dell strategy
Continue cash generation
Global expansion
Mitigate volatility
Fund & Pull-through
“New Dell“2 (Solutions)
Enterprise Solutions and Services
Faster growth
Expanding margins
Higher recurring revenue
Outpace market growth
Invest organically & inorganically
Leverage footprint
Integrated offerings
¹ “Core Dell” includes mobility, desktop, peripherals and third party software
2 “New Dell” includes servers, enterprise-related peripherals, networking, storage, services and software
13
Snapshot of “New Dell”
Q1 FY14 Revenue
Services
YoY growth: 2%
Software
YoY growth: NM
38%
56%
5%
Enterprise Solutions Group (ESG)
YoY growth: 10%
Servers
Peripherals
Networking
Storage
Revenue = $5.5bn
Key observations
ESG operating margin remains low
Heavy revenue contribution within ESG from servers
86% from servers, peripherals and networking
Significant potential for further margin erosion due to intensifying competition in x86 servers Emerging competitive threat from Cloud Large portion of Services operating income tied to “Core Dell” Support and Deployment
Q1 FY14 Operating income1,3
Services margin: 17.6%
88%
32%
ESG margin: 4.4%
Software represents (20%) of operating income
Operating income = $421mm2,3
Segment operating income ($ in millions)4
% Variance
Q1 FY14 Q1 FY13 (YoY)
ESG 136 79 71%
% margin 4.4% 2.8%
Services 370 338 10%
% margin 17.6% 16.3%
Software (85) 3 (6) NM
% margin NM NM
Source: Company filings, Wall Street research
Note: Fiscal year ended January; Represents “New Dell” based on realigned global operating segments as of Q1 FY14; Segment revenue includes internal revenue; Segment operating income excludes unallocated corporate expenses, amortization of intangible assets, severance and facility actions and acquisition-related costs and other proposed merger and retention bonus expenses
1 Sum of Services and ESG operating income contribution not equal to 100% due to negative Software operating income contribution of (20%); 2 Q1 FY14 operating income of $421mm includes Software’s negative operating income of ($85mm); 3 Software Q1 FY14 operating income includes $30-$35mm of amortized deferred revenue write-offs; 4 Segment data from 8-K filed on 5/16/13
14
“New Dell” faces integration and competitive risks
Key observations
Modest revenue contribution from acquisitions despite $13bn1 spend
Remains emerging player in software and services with ~1% share
Weak position in key growth segments: Cloud, SaaS
Risk of commoditization and profit erosion in x86 servers, partly driven by multiple threats from Cloud
Storage segment share
Dell 7.2%
Others
16.4%
EMC 33.4%
IBM 13.3%
(Gartner: 2012)
NetApp 11.3%
Hitachi Data Systems 9.6%
HP
8.8%
Networking segment share
Dell 1.9%
Others 17.2%
Cisco 62.3%
(IDC: 2012)
HP 9.1%
Alcatel-Lucent 2.9%
Juniper 2.6%
Brocade 2.1%
Huawei 2.0%
R&D / % of sales2
($ in millions)
5%3 $1,072
2%
Dell
$3,399
3%
HPQ
$6,302
6%
IBM
$4,523
12%
ORCL
12%
$2,560
EMC
14%
$904
NTAP
$5,488
12%
CSCO
Server (x86) segment share
Oracle 3.0%
Fujitsu 3.6%
Cisco 4.5%
IBM 16.0%
(IDC: 2012)
Dell 22.2%
HP 34.3%
Others 16.4%
Source: Company filings, FactSet, Gartner, IDC
Note: “New Dell” consists of servers, storage, networking, services and software
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 Based on latest reported fiscal year
3 Dell R&D for ESG is ~5% of ESG sales 15
PC market fundamentals are deteriorating rapidly
PC market outlook continues to deteriorate
Worldwide shipments (mm)
550 500 450 400 350 300 250
‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16
IDC estimates
Jun ‘12 Sep ‘12 Dec ‘12
Mar ‘13 Jun ‘13
2005-11A CAGR Historical: 9.7%
PCs
2012-16E CAGR
8.4% 7.4% 4.3% 1.7% (~1.5%)1
Other sources: 2012-16E CAGR Gartner: 0.5% Morgan Stanley2: (1.9%) Barclays: (4.4%)
38% decrease in IDC ‘16E shipment forecasts
PC competition intensifying
Asian vendors becoming increasingly aggressive, competing with operating margins in low single digits and gaining share
Dell’s share declined to 11.1% in FY13 from 15.0% in FY08
Emerging threats from new competitors and alternative mobile devices
PC shipments declined 13% YoY in Q1 2013, the largest drop in ~20 years3
Source: IDC, Gartner, Morgan Stanley, Barclays
1 Based on preliminary IDC estimates
2 Represents 2012-15E CAGR
3 Based on IDC data
16
PC profit pools shifting to segments where Dell is weak
Tablets expected to continue to cannibalize PC profit pools1
FY12 FY17
Dell strength
Dell weakness
PCs: $38bn
Tablets: $8bn
~(7%) CAGR
~30% CAGR
$26bn
$30bn
PC profit pools shifting to lower margin value segment1
FY12 FY17
Dell strength
Dell weakness
Std / Prem: $34bn
Value: $4bn
~(9%) CAGR
~4% CAGR
$21bn
$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)
17
“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 services, 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 services, 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
¹ Includes desktop, mobility and software and peripherals revenue in FY13
18
Trading multiples pressured by dependence on PC revenue
Revenue mix trend
“New Dell” “Core Dell”
77%
23%
66%
34%
Total revenue NTM2 EV / EBITDA NTM2 P / E
FY08 $61bn 6.4x 12.9x
FY13 $57bn 3.3x3 6.6x3
Dell has suffered severe multiple contraction during the continuing transition
Source: Company filings; FactSet
Note: Fiscal year ended January; “New Dell” includes servers, peripherals, networking, storage, services and software; “Core Dell” includes mobility, desktop, accessories and third party software
1 Acquisitions include AppAssure, Boomi, Clerity, Compellent, DFS Canada, EqualLogic, Exanet, Force10, InSiteOne, Kace, Make, Ocarina, Perot, Quest, RNA Networks, Scalent, SecureWorks, SonicWALL and Wyse
2 NTM represents next twelve months
3 FY13 NTM metrics based on Dell’s unaffected price and enterprise value as of 1/11/13 and Street consensus estimates as of 2/1/13, prior to the announcement of the transaction
19
Agenda
Transaction process 3
Perspectives on Dell today 13
Evolution of financial forecasts 21
Evaluation of strategic alternatives 29
20
Continued deterioration of Dell’s financial performance
Key metrics ($ billions, except per share data)
Revenue
$62.1
(8%)
$56.9
Final FY14 Board Case LQA 1Q FY14
$56.5
$56.3
FY12 FY13
Operating income1
$5.1
(28%)
$3.7
Final FY14 Board Case LQA 1Q FY14
$3.0
$2.4
FY12 FY13
% mgn: 8.2% 6.4%
EPS1
Final FY14 Board Case2 LQA 1Q FY14
$2.10
(25%)
$1.58
$1.25
$0.84
FY12 FY13
Free cash flow
$5.2
(43%)
$3.0
FY12 FY13
% mgn: 8.4% 5.2%
Source: Company filings
¹ Excludes one-time $250mm gain in Q4 FY13 and $70mm gain in Q2 FY12 and Q2 FY13 from vendor settlements
2 Based on $0.2bn net interest expense, 21% tax rate and 1,740mm weighted average shares outstanding
21
Forecasting has been poor in a challenging environment
Quarterly revenue and EPS performance
FY12
Q1 (Apr)
Q2 (Jul)
Q3 (Oct)
Q4 (Jan)
Revenue
EPS EPS
Results vs.
Board plan
Results vs.
Board plan
FY13
FY14
Q1 (Apr)
Q2 (Jul)
Q3 (Oct)
Q4 (Jan)
(Apr)
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
Source: Company filings; Dell management plan
1 Excludes one-time $250mm gain in Q4 FY13 and $70mm gain in Q2 FY12 and Q2 FY13 from vendor settlements
22
Internal forecasts have been steadily revised downwards
3 weeks after approving plan, Dell significantly missed Q2 and revised EPS guidance down 25%
FY13
FY14
Scenario
July Plan
9/21 Case
Preliminary FY14 Board Case (1/18/13)
Final FY14 Board Case (3/13/13)
FY13
Revenue ($bn)
$63.0
Op. Inc. ($bn)
$5.2
EPS
$2.27
57.5
(9%)
4.0
(23%)
1.70
(25%)
FY13 Actual¹
56.9
(1%)
3.7
(9% )
1.58
(7%)
FY14
Revenue ($bn)
$66.0
Op. Inc. ($bn)
$5.6
EPS
$2.50
Time frame
59.9
(9%)
4.2
(25%)
1.84
(26%)
~2 mo.
56.0
(7%)
3.7
(12%)
1.59
(14%)
~4 mo.
56.5
1%
3.0
(19%)
1.25²
(21%)
~2 mo.
Cumulative change since July 2012: (10%) (30%) (31%) (14%) (46%) (50%) ~8 mo.
Source: Company filings; Dell management for plan
¹ Excludes one-time $250mm gain in Q4 FY13 and $70mm gain in Q2 FY13 from vendor settlements
² Based on $0.2bn net interest expense, 21% tax rate and 1,740mm weighted average shares outstanding
23
BCG retained to evaluate business and options
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 $3.3bn
– Categories of costs have been identified for 25% case but not 75% case
– Savings assumed phased in over 3 years
Source: BCG
1 Based on Dell management’s estimated cost savings by FY16 for its fully implemented productivity cost takeout
24
BCG validated business performance challenges
Market shift to value segments / tablets, where Dell has limited presence Slow enterprise transformation with acquisitions performing below expectations BCG created a “base case” forecast for Dell, grounded in external market dynamics
Combined market revenue of PCs and tablets growing at 4% per year Tablets growing rapidly and market shifting from premium to value PCs Other Dell business segments growing organically in line with the market Lower revenue and operating income relative to management forecast
BCG identified opportunities for 25% Case
Organizational de-layering
Simplification and labor and transport savings from building-to-stock
Market performance tracking BCG’s expectations, but no net cost reduction opportunities have been realized
Source: BCG
25
Dell significantly underperforming BCG forecasts
Operating income ($ in billions)
BCG Base Case
BCG 25% Case
BCG 75% Case
Street consensus
Final FY14 Board Case
LQA 1Q FY141
$6.0
$5.0
$4.0
$3.0
$2.0
FY13 FY14 FY15 FY16 FY17
$3.9 $3.9 $3.9 $3.9
$3.6 $3.4 $3.4
$3.0
$2.5
$2.4
$4.5
$3.7 $3.3 $2.9
$5.7 $4.0 $3.2
$5.5 $3.8 $3.0
FY13 – FY17E CAGR
BCG 75% Case: 9.3%
BCG 25% Case: (0.2%)
BCG Base Case: (6.2%)
Source: Dell management, BCG forecasts, Wall Street estimates as of 6/3/13
1 1Q FY14 operating income of $590mm annualized
26
Margin pressure trend continues in Q1 FY14
Non-GAAP Q1 FY14 results ($ in billions, except per share data)
Q1 FY14
Revenue $14.1
% growth (YoY) (2.4%)
Gross profit 2.9
% margin 20.6%
Operating income 0.6
% margin 4.2%
Diluted EPS $0.21
Free cash flow1 ($0.3)
% Variance
Consensus (to cons.)
$13.5 4.3% (6.4%)
3.0 (2.8%) 22.1%
0.8 (28.2%) 6.1%
$0.35 (39.1%)
%
Variance
Q1 FY13 (YoY)
$14.4 (2.4%) (4.0%)
3.2 (8.5%) 22.0%
1.0 (41.6%) 7.0%
$0.43 (50.9%)
($0.4) NM
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
Source: Dell management, FactSet Note: Dell fiscal year ended January
1 Free cash flow defined as cash flow from operations less capital expenditures less change in financing receivables
27
Agenda
Transaction process 3
Perspectives on Dell today 13
Evolution of financial forecasts 21
Evaluation of strategic alternatives 29
28
Full range of strategic alternatives considered
Enhanced capital distribution
Levered recap (special dividend or buyback)
Regular dividend increase
Separation
EUC
DFS
Benefits
Delivers upfront cash to shareholders
Provides opportunity to share upside
Utilize cash flow to increase dividend
Dividend payers rewarded by market
Remove revenue and margin volatility Improve financial stability Eliminate long-term secular pressure from PC industry
Potentially unlocks leverage capacity for remaining businesses
Ability to focus on core business vs. financing
Challenges
Significantly elevates risk given business outlook
Weak public equity story and limited strategic flexibility
Constrained recurring domestic cash flow
Diminishing marginal returns with yield increases
Significant dis-synergies, especially with support and deployment, and disruption to remaining segments
Limited cash flow to finance “New Dell” growth Significant time required and high complexity
Potential competitive disadvantage to domestic OEM’s
Significant time required and high complexity
29
Full range of strategic alternatives considered (cont’d)
Transformative acquisitions
Sale to strategic
Benefits
Grow Enterprise, Software, and Services businesses in targeted areas
Opportunity to improve growth and margin profile
Immediate value creation
De-risks standalone plan
Challenges
Limited number of targets of scale at reasonable valuations
High interloper risk for key assets
- Transaction size likely a deterrent
- Views validated by fact that no strategic buyer put forth a proposal
We thoroughly evaluated all strategic alternatives and determined the $13.65 transaction is the most attractive alternative
30
Summary of Icahn / Southeastern May 9th letter
Overview of May 9th letter
Shareholders can elect to receive either:
$12.00 cash dividend per share
$12.00 in additional shares valued at $1.65
Icahn and Southeastern to elect stock consideration (disclosed ~13% ownership)
Illustrative analysis assumes 20% of shareholders elect to receive additional shares (no commitment for remaining ~7%)
Total net funding of $17.3bn:
$8.8bn Dell cash1
$3.3bn net financing receivables proceeds (uncommitted)
$5.2bn bridge loan (uncommitted)
12 directors subsequently nominated for next annual meeting2
Key Special Committee requests made on May 13th for clarification of letter
Draft of definitive agreement
Proposed financing details, including draft commitment letters
Counterparty and commitment letter for proposed receivables sale
Arrangements to provide necessary working capital and liquidity post closing
Commitment letters for parties electing to receive share distributions in lieu of cash
Tax implications of stock dividend to shareholders
Management team and operating plan
Icahn / Southeastern shareholder agreement
¹ $9.2bn of cash sources net of $0.4bn of transaction fees (Source: Information provided by Icahn)
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
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Leveraged recap considerations
Leveraged recap considerations
Elevated risks due to leverage
Elevates Dell’s risk profile
FY14E operating income has declined 46% since the July Plan Potential adverse employee, vendor and customer perception
Significantly weaker financial profile than key enterprise peers Weak financial position to complete transformation
Dell will remain largely a PC company (~2/3 of revenues)
Poor public-market equity story
Highly levered
Deteriorating cash flow metrics Few precedents Reduced float Value uncertainty
Dramatically elevated risk profile and uncertainty for existing Dell shareholders
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Liquidity deficiencies in Icahn/Southeastern letter
$17.3
$1.4
$0.5
$1.7
$0.3
$13.4
Cash available for dividend per letter
Assumes funding from uncommitted bridge loan ($5.2bn), Dell cash and sale of receivables
$12.00 dividend if 20% of shares elect stock
Near-term debt maturities
Liquidity to fund Dell debt maturities through April 2014
Shortfalls in estimated cash available
1H cash generation expectations given weak Q1 and outlook1
Adjustments for minimum cash needs
Variance to minimum cash needs and additional liquidity equal to Silver Lake undrawn revolver at closing2
Incremental termination fees
Icahn / Southeastern are not an “Excluded Party”; termination fee should be $450mm vs. $180mm assumed
Adjusted cash available for dividend
$3.9bn potential funding shortfall
$9.35 dividend if 20% of shares elect stock
~$8.50 dividend if only Icahn / Southeastern elect stock
Significant liquidity gap to fully fund the proposed dividend
Note: All values $ billions, Assumes transaction date of 7/31/13; assumes management cash ($13.3bn) and debt ($6.8bn) estimates as of 7/31/13 and diluted shares outstanding of 1,788
1 Icahn/Southeastern letter assumes 1H FY14 cash flows and debt pay down of ~$0.9bn and ~$2.4bn versus company expectation of ~$0.3bn and ~$2.2bn, respectively
2 Assumes $6.4bn of minimum cash
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Multiple expansion required is unrealistic
Illustrative aggregate package value
Icahn/ Southeastern Icahn/ adjusted for Southeastern incremental letter liquidity needs
Shares electing cash dividend (%)
Value per share of Silver Lake/Michael Dell merger Value of cash dividend per share Breakeven stub equity value per share
Stub equity as % of assumed package value
Pre-transaction shares outstanding (bn) Add: New shares issued (bn) Pro forma shares outstanding (bn)
Pro forma equity value to breakeven ($ bn)
Add: Pro forma net debt ($ bn)
Pro forma enterprise value to breakeven ($ bn)
80%
$13.65
- $12.00 $1.65
12%
1.8
+ 2.6 x 4.4
$7.2
+ $6.0 $13.2
87%
$13.65
~ $8.50 $5.15
38%
1.8 0.4 2.2
$11.1 $2.7 $13.8
Highly uncertain stub value
Negative earnings / business trajectory makes multiple expansion less likely
After adjusting the dividend down for liquidity constraints, nearly 40% of the package value would have to come from stub equity
Break even EV / EBITDA trading multiple
Final FY14 Board case1 LQA Q1 FY142
Memo: Consensus Dell unaffected 3
4.1x 5.1x
3.3x
4.2x 5.4x
3.3x
Given high leverage, EBITDA multiple would be the primary valuation method
Significant multiple expansion will be required to achieve $13.65 value parity in the face of deteriorating financial performance and high leverage
Note: The aggregate number of new shares is a function of the number of shares electing stock (20% or 13% of total), the target dividend ($12.00 or ~$8.50) and the assumed value of the stock ($1.65 and $5.15)
1 Final FY14 Board Case EBITDA of $3,254mm, pro forma for loss of DFS income of $323mm
2 LQA Q1 FY14 EBITDA of $2,569mm, pro forma for loss of DFS income of $323mm
3 Unaffected multiples shown at stock price of $10.88 as of 1/11/13, unaffected before transaction rumors
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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 $36.00 (PF leverage of ~9x) and stock has declined ~71% since then
Stock price performance of outstanding stub ($)
$45
$30
$15
$0
1/1/07 4/14/08 7/27/09 11/8/10 2/20/12 6/3/13
1/29/07: Clear Channel discloses the proposed acquisition by Bain Capital and T.H. Lee Partners for $37.60
Clear Channel Communications / CC Media Holdings
S&P 500
7/30/08: The acquisition of Clear Channel closes ($35.98)
Offer price: $36.00
(71%)
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
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Dramatic underperformance for voted down transactions
Target stock price performance for voted down transactions (2005—2012)
Target
TGC Industries
Dynegy
VaxGen
Cablevision Systems Randolph Bank & Trust Lear Eddie Bauer Holdings Cornell Companies Corning Natural Gas
Acquirer
Dawson Geophysical Blackstone OXiGENE
Charles and James Dolan Bank of the Carolinas American Real Estate Partners Sun Capital and Golden Gate Capital Veritas Capital C&T Enterprises
Declining shareholders
TGC Industries
Dynegy
VaxGen
Cablevision Systems Randolph Bank & Trust Lear Eddie Bauer Holdings Cornell Companies Corning Natural Gas
Announce Voted date down date 03/21/11 10/28/11
08/13/10 11/23/10 10/15/09 02/12/10 05/02/07 10/24/07 04/12/07 11/14/07 02/05/07 07/16/07 11/13/06 02/09/07 10/09/06 01/23/07 05/11/06 10/17/06
Mean
Median
LBO
Price performance following date voted down vs. unaffected
1-year 10.7%
(13.7%) (42.9%) (54.7%) (13.3%) (60.3%) (27.2%) 21.5% 22.9%
(17.4%)
(13.7%)
2-year NA
(90.0%) (58.6%) (28.1%) (61.3%) (99.0%) (92.1%) (21.8%) 18.0%
(54.1%)
(59.9%)
ISS rec.
For For NA Against For Against For Against For
Average 1-year and 2-year declines of 17% and 54%, respectively
Source: FactSet, ISS
Note: Includes transactions 2005 – 2012, U.S. target only
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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
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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.
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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.
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