FORTUNE — How would Silver Lake Partners sell Dell Inc. after taking it private for upwards of $25 billion?
Yes, this is getting ahead of ourselves a bit. Silver Lake hasn’t even made a formal offer yet, let alone one that Dell DELL or its shareholders have accepted. And I remain skeptical. But private equity firms don’t get this far into deal talks without having mapped out a viable exit plan, even if the specifics usually change over time.
Typically, private equity firms exit their investments either by selling the company or taking it public. Dell, however, would be a very difficult company to sell at a premium (if it were to to collapse, of course, then this exercise is largely irrelevant). Not only because of its size, but also because the universe of possible strategic acquirers could probably fit on a chip. Maybe Lenovo LNVGY. Maybe Oracle ORCL. Maybe Cisco csco. Or maybe IBM IBM is having PC seller’s remorse. Worth noting that none of these companies are rumored to be prepping a rival bid to Silver Lake.
It’s also possible that Silver Lake could simply sell its equity position to another private equity firm– thus keeping Dell private and independent — although such changes in control typically trigger debt restructuring (worth noting that such triggers don’t seem to exist on most of Dell’s existing debt).
A more likely scenario would an IPO, since that is what ultimately happens to almost all $15 billion+ companies that get acquired by private equity (a notable exception being Alltel, which was sold to Verizon). The problem here, however, is that this entire deal is being driven by Michael Dell’s abhorrence of running a publicly-traded company.
Remember, it was Dell that reached out to private equity firms — not the other way around. And Michael Dell not only would be expected to roll over his existing 16% stake, but chances are he’d also invest significantly more capital from his personal fortune. In other words, this buyout wouldn’t be about founder liquidity. Instead, the founder would be doubling down and expecting to retain control. How exactly would Silver Lake convince him to go back out on an IPO road show in 2017 or 2018? Is it really betting that time away from bank analysts makes the heart grow fonder?
So if not a sale and not an IPO, what’s left? Well, an anonymous emailer suggests the following:
“Michael Dell could take out the PE sponsor in 5-7 years, once the company has paid down a good portion of the acquisition debt. At that point, Michael Dell would recap the company and use the proceeds to repay Silver Lake at more than two times its original investment.”
This is an appealing theory, because everyone gets what they want. Silver Lake has a profitable exit path, lenders get paid and Michael Dell gets to keep running his company as a private, independent entity.
Obviously such a scenario is dependent on Dell successfully transitioning its core focus from hardware to services, and a variety of other business factors. Moreover, it must do so without relying on large acquisitions — since that recent strategy is the reason Dell’s massive operating cash flows keep getting gobbled up (thus hampering its ability to service and repay debt).
But Silver Lake is clearly has interest in betting on that upside, which means it might enable Michael Dell to regain the autonomy he first lost upon taking his company public 25 years ago. No wonder he’s been so eager to find a private equity partner.
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