GAMBLING IT ALL
On March 4, 2004, Michael Dell proudly announced that he would be stepping down from his role as CEO and entering the first stages of retirement. He had grown Dell into a multi-deca billion-dollar company that was synonymous with affordable computers around the world. This success had made 2,700 employees into millionaires and gave Michael a personal net worth of $16 billion.
But, the next decade wasn’t so easy for Dell. In fact, it was quite rough. A slew of Asian manufacturers with razor-thin profit margins would explode in popularity like Asus, Acer, and Lenovo. And this trend would annihilate Dell’s profit margins to the tune of 72%.
Dell would post negative quarter after negative quarter and their projections were simply even less hopeful. But while this was definitely a shame, this didn’t really affect Michael financially. He was still worth roughly the same at $15 billion, and it seemed like a good time to derisk. He could simply sell off his stake for a 20 to 30% discount and easily walk away with $10 billion or so after taxes.
But, instead, Michael would decide to do the exact opposite. He would go out and borrow $19.4 billion and take the entire company private. This itself was a rather risky move as he was already levered up more than 1 to 1, but this was just the beginning.
The first $19.4 billion had simply given him control over the company. Now, he actually needed capital to reinvent the business, so he would go out and borrow another $50 billion bringing his total debt to $70 billion. Keep in mind, Michael was rich but he was only $15 billion rich and now he was $70 billion in debt.
That’s why this deal made history becoming the largest technology leverage buyout of all time. And, if you haven’t yet grasped how risky this was, let me put this another way. The new Dell corporation only had to fall 22% before creditors could margin call Michael for his entire fortune.
And given that profits had already declined 72%, 22% worth of downside protection really wasn’t much. But, despite the odds, Michael would go on to pull off the deal of a century. After successfully reinventing the company, Michael would retake Dell public in late 2018.
And today, Dell is trading at an all-time high with a market cap of $61 billion. Michael owns roughly 52% of Dell, so this gives him a solid net worth of $32 billion. A pretty strong turnaround for a declining company but that’s not the whole story because Michael isn’t worth $32 billion today.
No, Michael is actually worth $86.6 billion, making him the 15th richest person in the world, only beaten out by the FAANG founders. So, not only was Michael able to turn around Dell but he was able to delink his fortune from Dell and grow it from $15 billion to $86 billion, all at the same time. So, here’s the insane story of how Michael Dell gambled his entire fortune and won.
TAKING DELL PRIVATE
Taking a look back, the first challenge in Michael’s comeback was actually taking Dell private. Just because Michael was willing to risk it all and pivot the company doesn’t mean that creditors were jumping up and down to lend him $70 billion to do it.
In fact, it was quite the opposite, as this would end up being one of the nastiest tech buyouts ever. And the only reason that Michael went down this path is because it was truly the only option he had left. You see, while Michael didn’t take Dell private till 2013, he had already come out of retirement in 2007.
At the time, Dell was rapidly losing market share to HP and the Asian PC makers, and frankly, Michael didn’t see all the bright future for the consumer PC business. PCs were quickly becoming commoditized and profits were evaporating from the entire industry, so Michael felt that the best strategy was to focus on software and services as opposed to hardware.
As such, the first thing he did was go on a $10 billion buying spree in the late 2000s. This included acquisitions like Perot Systems for $3.9 billion in 2009, and this actually worked out surprisingly well. Within the next 5 years, Dell would turn a $10 billion investment in non-PC businesses into a $21 billion business.
And they had a pretty good shot at continuing to grow this into a $30 to $40 billion business, but the market didn’t care at all. All the media headlines were about Dell’s shrinking market share and declining profits, and investor sentiment followed.
They felt that instead of trying to revive the PC business or compete in the new world of smartphones, Dell was super distracted, investing large amounts into completely unrelated businesses. And as such, the stock price was in the absolute gutter.
What had once been a $40 stock in 2004 was now trading at just $12 in 2012 and investors wanted out. In fact, Dell’s second biggest shareholder, Southeastern Asset Management, called up Michael and told him that they would be willing to sell their entire stake for the right price.
And this conversation is what started turning the gears for Michael: What if he took Dell private? Naturally, this felt like a forbidden question that was completely outside reality because such a large buyout had never been done before.
Nonetheless, Michael decided to shoot his shot. One month later at a tech conference, Michael would run into the famous Egon Durban from Silver Lake Partners. You’ve probably never heard of this guy, but believe me, this guy is a legendary private equity guy behind the scenes. He was early to Skype, Seagate, and Avago Technologies which is what would eventually become the $500 billion giant that is Broadcom.
So, little to say, he had plenty of money. The only question was: would he help Michael take Dell private? Well, the answer was absolutely. It turns out that Egon’s investment team had already researched Dell, and he had a pretty good idea of what Michael was about to ask.
In fact, Egon would say quote, “If I were in your position, I would try to take Dell private. And I don't think you need Silver Lake to do it.” And his reasoning was quite interesting. He said that if Dell was just now trying to pivot to enterprise, he wouldn’t back the move.
But, the way he saw it, Dell was already an enterprise company and the market just hadn’t realized it yet, so he was more than happy to back to move with $20 billion. But, if it was easy to convince the investor, what was so hard about going private? Well, that would have to do with a man named Carl Icahn.
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KEEPING DELL ALIVE
If you’re not familiar with Carl Icahn, he’s a legendary corporate raider who’s made tens of billions buying out beaten-down companies and selling them for parts and his next target was Dell. Truth be told, Icahn was by no means a tech guy and he had little clue as to what was going on at Dell.
But, as a seasoned corporate raider, he was absolutely certain about one thing: if someone was willing to put $20 billion and eventually $70 billion into a declining $25 billion business, something was up. In fact, after reading about the deal in the newspaper, he immediately purchased a $1 billion stake in Dell and launched his own takeover bid for the company.
Do you remember Southeastern Asset Management? Dell’s 2nd largest shareholder that was willing to sell for the right price? Well, Icahn would target them and give them an offer they couldn’t refuse and pretty soon, Icahn would become Dell’s 2nd largest shareholder only behind Michael himself.
And Icahn’s message to investors was pretty clear. Whatever Michael was willing to pay to take Dell private, he was willing to pay more. Icahn even offered a $10 million sign-on bonus to a big tech executive, who is speculated to be Compaq CEO Michael Capellas, to replace Michael Dell.
So, little to say, Icahn was pretty serious and enterprise customers were starting to get spooked. In fact, some customers even had Michael sign a change-of-control provision which basically meant that they could break their contracts and move elsewhere if there was a change in CEO.
Fortunately for Michael, he would end up coming out on top in this poker match against Carl Icahn, though it cost him an extra $500 million. But on October 30, 2013, Michael would finally take Dell private. Michael would hand out cupcakes to all of his employees to celebrate, but the real challenge had just begun.
Dell was officially the largest company by revenue to go from public to private, meaning that they were now the world’s largest startup, and that’s exactly how Dell wanted it. With a staggering 75% stake in the new Dell, the only investor Michael had to answer to was himself, and now it was time to make the pivot of a lifetime. Michael’s first order of business, however, was not to go all in on enterprise but actually save the consumer PC business.
You see, Michael knew that there were no profits left in selling PCs unless you were Apple, and that’s why he wanted to pivot to enterprise, but that didn’t mean that he was willing to just kill off the consumer business. Absolutely not. In fact, Michael knew exactly how to keep the consumer business relevant, but he could never do it as a public company.
The secret was to simply slash margins to 0 and switch to a build-to-inventory approach. This basically means that Dell doesn’t actually build your laptop or PC until you order it online. This way, they’re not burning any money on inventory. This move not only wiped out all of Dell’s profits but it actually made them a money-burning company.
But, at the same time, it also allowed Dell to compete against Asian manufacturers and keep the brand relevant within the consumer space. And now that Michael had successfully saved his original business, it was time to build a new business that could actually pay for everything.
THE GREAT PIVOT
Dell’s internal enterprise offerings were quickly growing in popularity, but Michael knew that if he truly wanted to move the needle at a company that was as big as Dell, he needed an acquisition. Naturally, this would lead to acquisitions in the $5 to $10 billion range with the goal to 4 or 5X the acquired business.
But, let’s just say that Michael was of the mindset of going big or going home, and he would go big. He would scope out a massive enterprise business named EMC. Business was going quite well for EMC but they were facing massive pressure from investors to spin off one of their most successful subsidiaries: VMware.
This way, investors would be able to invest in the high-growth VMware without having to invest in the rest of EMC. Naturally, EMC didn’t want to offload their best asset and they were looking for someone to save them from these activist investors.
Michael was very much interested in being that savior, but there was just one problem. EMC was way bigger than Dell. Normally, if these companies wanted to unite, it would be EMC that would buy Dell, but in this situation, that wouldn’t help EMC at all.
If EMC bought Dell, EMC would still have all of its investors who were pushing for a VMware spinoff. So, the only way this would work is if Dell bought EMC and bought out all of their investors. And given that investors were quite bullish on VMware, they weren’t gonna sell EMC for a cheap price.
The amount they wanted was $67 billion. This is the point in the story where any normal person would walk away, especially someone who has already levered up $20 billion, but you already know what happened.
In late 2016, Michael would borrow $48.6 billion so that he could acquire the $67 billion behemoth that was EMC. Since then, both Dell and EMC have done well for themselves. They were able to regain profitability, survive the massive debt payments, and become a strong profitable public company once again whose stock has grown 6X over the past several years.
This itself would’ve been an insane turnaround story, but as investors had pointed out, the real golden goose with EMC was VMware. If you’re not familiar with VMware, they specialize in creating virtualization software.
In a very watered-down description, their software basically allows each physical computer to run a bunch of smaller virtual computers. This technology is basically completely useless for you and me but for cloud providers, this stuff is voodoo magic.
It allows for greater efficiency, lower operating expenses, faster deployments, better performance, and far better availability. And I don’t think I need to tell you that the cloud market has exploded over the past decade.
As such, VMware has also naturally exploded. It’s not clear how much Dell paid for VMware but we do know that EMC only paid $635 million for VMware. Do you wanna guess how much VMware is worth today?
Well, just a few months ago, Broadcom acquired VMware for $69 billion. And by the time the deal closed, Broadcom stock had appreciated so much that the deal was now worth $92 billion. It’s estimated that $70 billion of this went to none other than Michael Dell and Silver Lake. And this was really the final chapter of Michael’s decade-long gamble.
Wrapping Up
Now, I should note that there is a massive controversy regarding how Broadcom is gonna ruin VMware, but that’s a story for another video. From Michael’s perspective, he couldn’t have played this any better. He saved his consumer business, he established a giant enterprise business, and he netted an extra $70 billion for himself and his creditors.
Today, Michael stands at $86.6 billion and is on track to cross $100 billion, something that has primarily only been accomplished by his tech peers who founded companies 20-30 times the size of Dell.
And that’s how Michael Dell gambled his entire fortune and won. Would you have the guts to make such a bet or would you have walked away with the $10 billion you already had? Comment that down below.
