NEW YORK (TheStreet) -- The possible mega-leveraged buyouts of BlackBerry (BBRY) and Dell (DELL) should signal to executives in volatile businesses like technology that the private equity industry has officially become part of the corporate life-cycle.
Time to insert private equity buyouts as a final option for a company after all other turnaround prospects have dimmed and continued shareholder destruction looms. While this isn't too shocking of a statement -- private equity has always been considered a buyer of last resort for publicly traded companies -- thinking about LBOs in that manner could demystify the rationale of such deals.
Whether it is Dell's proposed buyout by founder Michael Dell and Silver Lake Partners, or the prospect that a PE industry giant tries to take BlackBerry private, these takeovers are often incorrectly described to the investing public as "turnarounds."
You will see reports about how Dell or BlackBerry may be in a better position to execute a turnaround as a privately-held company. Presumably, such statements mean that Dell's plight amid chronic declines to the PC-industry has to do with its existing shareholders... Or that the holder of a few BlackBerry shares in a Fidelity account was responsible for the company's inability to compete with the Apple (AAPL) iPhone.Of course, those characterizations are incorrect. Put simply, there is no turnaround to Dell's PC-business and there is little hope BlackBerry can be a relevant consumer-oriented smartphone maker again. So why would Michael Dell and Silver Lake put up about $25 billion for Dell, or a PE firm -- reportedly Silver Lake again -- put up over $6 billion for BlackBerry? The most important answer is that they aren't actually paying that much. Dell's buyout is being financed with over $16 billion in debt, meaning that the company's effective price tag to its LBO buyers is less than $10 billion. BlackBerry carries no debt on its balance sheet, indicating that a PE firm could probably finance the majority of a takeover, and at a premium to current share prices. If one were to market LBOs as simple financial engineering that any C-Suite should consider, it might better explain the string of prominent private equity buyouts of once-dominant businesses that is likely to continue for the foreseeable future. Private equity buyers, in such a scenario, would simply represent the best possible marriage of investor interests to a declining business. Since PE giants like Blackstone, KKR and Apollo Global Management can buy businesses for about a third and no-more-than-half of their actual price tag, in some cases it is a better alignment of investors in a company at a certain price. By selling shares to a PE firm, corporations can effectively achieve double or triple the price they would get from the ordinary stock investor. In Dell's case, the rationale for a PE buyout under such assumptions may actually not be strong enough. Billionaire activist investor Carl Icahn has contested Dell's takeover for nearly six-months with the argument that a sale of the PC-maker's businesses and a distribution of over $12 billion in unused cash can fetch more that the company's current $25 billion price. For a while, Icahn's argument for the effective liquidation of Dell's cash and assets as a publicly traded company had strong support from shareholders. So much so, that Michael Dell and Silver Lake had to raise their offer and a special committee running the sale process had to change the voting rules for the deal. [Icahn is currently battling Dell's LBO in court.] Instead of proving a credible turnaround strategy to BlackBerry shareholders, a PE buyer similarly will have to prove that their debt-financed takeover fetches a better price for the company than a liquidation. That, too, may be hard to prove. BlackBerry hasn't yet tried to sell any assets and it continues to rob investors of earnings and cash flow from a once strongly-positioned enterprise business by chasing after the consumer smartphone market. Ultimately, the case for a BlackBerry LBO would likely come down to the argument that the terminal equity value of the company's enterprise business, under the best arrangement of debt financing, is only about $2 billion or $3 billion. In that sense, the argument would also be that BlackBerry, like Dell, is significantly overvalued in current markets. Some stock analysts have said so much for years. Thankfully for BlackBerry shareholders, the company appears to be open to an LBO only if other options for the company fail. In a Monday press release, BlackBerry said that in addition to a full sale of the company, a special committee appointed by the company's board will also consider joint ventures, strategic partnerships and alliances to maximize its value. Dell, in contrast, announced its LBO deal in February after an acquisition binge and before opening itself to other alternatives.
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