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Dell Says It Met With Banks About An IPO ‘Contingency Plan’

Dell Technologies Inc., the world’s largest private technology company, met with investment banks to discuss a conventional initial public offering, among other options, stoking doubts about its ability to return to public markets through a $21.7 billion deal that has drawn investor scrutiny.

An IPO would be “a potential contingency plan” in the event that investors vote down Dell’s proposal to buy out its tracking stock, DVMT, the Round Rock, Texas-based company said Wednesday in a regulatory filing. This would mean Dell would become public again by selling its own common stock to public market investors.

It’s an option the company and its backer, Silver Lake, considered and then backed away from, in favor of a proposed deal to buy out the DVMT shares that track Dell’s stake in VMware Inc. The move is designed to help billionaire founder Michael Dell streamline his tech empire, which includes Dell, the tracking stock and a majority stake in VMware.

Some investors have balked at the proposed DVMT buyout, questioning how Dell arrived at a valuation that’s seen as too high. The offer of $109 a share in cash and Dell Class C stock values Dell’s Class C shares at $79.77 — a number that more than doubled during the company’s internal calculations in the months before the deal.

Dell has seen the DVMT share-swap transaction as binary: either investors agree to the current proposed price or the company will scrap that option, people familiar with the matter have said.

The board continues to believe that a direct listing “is in the best interests of Dell’s stockholders and Dell is proceeding to seek stockholder approval” for the transaction, according to the filing Wednesday. Even if investors don’t approve the deal, there’s no guarantee that Dell will pursue an IPO of Class C shares.

In a conventional IPO, management would still have to justify the company’s valuation to a broad swath of public market investors. That route would also allow the company to convert the DVMT shares into Dell common stock whether the holders like it or not.

A forced conversion after an IPO would leave DVMT holders with 41 percent to 43 percent of Dell, according to an August note from Sanford C. Bernstein analyst Mark Moerdler. That’s a larger stake in the company than the 21 percent to 31 percent expected in the proposed tracking stock buyout, according to a July filing.

Silver Lake, which has a 24 percent stake in Dell, has a right to force Dell pursue an IPO beginning Oct. 29, 2018, under the terms of the original take-private agreement. Dell is obligated to pursue a share sale within 180 days of the notice being served by Silver Lake, including hiring financial advisers, according to the agreement. – Bloomberg Quint

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