Why Blackstone Is Best for Dell

by Tom Taulli | March 26, 2013 12:21 pm

The Blackstone Group (NYSE:BX[1]) prefers to invest in … well … boring companies. Of course, in many cases, those boring companies are suffering problems and perhaps even facing bankruptcy.

Still, BX’s strategy has turned out to be great for its investors. So far this year, shares are up a sizzling 28%, blowing away the broader market’s 9% climb.

Now, the company has expressed interest in making a bid for Dell (NASDAQ:DELL[2]) … and it looks like it could be another good deal.

To see why, it’s important to understand BX’s go-to-market approach. Unlike many other private equity firms, Blackstone is not just about piling debt on a company, cutting costs and finding an exit — such as a sale or IPO. Instead, BX goes beyond this. When the firm buys a company, it takes an intense operational role.

The Case Study

An excellent case study of this is PBF Energy (NYSE:PBF[3]).

PBF got its start back in 2008, when the oil refining business was in deep trouble. But BX saw an opportunity to pick up assets at a dirt-cheap price.

The firm just needed a proven management team and a solid business plan. To this end, BX hired Thomas O’Malley as the executive chairman. During his more than 30 years in the refining business, he’s been able to make investors gobs of money. In the past decade alone, he solid Tosco to Phillips Petroleum, which later became part of ConocoPhillips (NYSE:COP[4]), and then Premcor to Valero (NYSE:VLO[5]).

Even at age 70, O’Malley still wanted another bite at the apple. So with PBF, he wasted little time, quickly striking deals for three refineries from Valero and Sunoco (NYSE:SUN[6]). Keep in mind that these assets already had $2.5 billion in capital investments (since 2006).

O’Malley simply knew he had to get the cost structure down to a level that could withstand a harsh economic environment. Thus, he cut deals with unions and even snagged government support, while also setting out to lock-in long-term contracts that would ensure a reliable revenue stream.

All in all, the plan was a winner. Last December, PBF came public at $26 a share. The stock is now currently trading at just under $39 — an 33% gain.

Plus, the BX playbook has many similar examples. Just look at Pinnnacle Foods, which plans to come public this week[7], on top of SeaWorld, which will hit the markets soon. Both deals involved a good amount of restructuring as well as new leadership teams.

The Dell Deal

In a way, Dell is in a similar spot that PBF was in when BX made its deal. The computer-maker is suffering from an overall deterioration of its core business and the CEO, Michael Dell, does not seem to have a viable plan to get things back on track.

In fact, for success, Mr. Dell likely needs to step aside. Unlike Steve Jobs, his second act has been a disappointment. Perhaps he does not have the competitive fire anymore — after all, he’s still a worth over $14 billion — or does not have the skill sets to lead a massive organization, which generates over $62 billion in revenues.

For precisely that reason, it looks like BX has already identified a new CEO: Michael Capellas. Early in his career, Capellas gained valuable experience at companies like SAP (NYSE:SAP[8]) and Oracle (NASDAQ:ORCL[9]). Then in 1999, he took the helm at Compaq. During his tenure, he repaired the relationship with Microsoft (NASDAQ:MSFT[10]), which helped to improve Compaq’s overall business. A couple years later, he sold the company to Hewlett-Packard (NYSE:HPQ[11]).

After this, he became the CEO of WorldCom, which was embroiled in bankruptcy. He effectively restructured the company and sold it to Verizon (NYSE:VZ[12]) about four years later.

As of now, Capellas is the CEO of VCE, which is a joint venture between Cisco (NASDAQ:CSCO[13]) and EMC (NYSE:EMC[14]). The focus of the business is creating cloud-based technologies.

In light of all this, Capellas seems like an ideal fit for Dell. With the financial resources of BX, he can use Dell as a vehicle for aggressive acquisitions to leverage the global customer base. Of course, some of the target industries are likely to be mobile, virtualization and the cloud.

Dell’s deep experience with hardware and integration with tech vendors should be helpful in getting a piece of the fast-growing tablet market, too. While the Apple (NASDAQ:AAPL[15]) iPad is dominant in the consumer market, it has not been as successful in the enterprise world — so that could be a huge opportunity for Dell.

All in all, BX can bring a fresh perspective as well as a top-notch management team and financial resources. More importantly, it’s a good bet that the firm already has a solid plan for making a Dell a success once again.

The Bottom Line

In the end, it’s no fluke that BX has had tremendous success over the past two decades. It now is the largest alternative asset firm, with about $210 billion total. Its business not only includes private equity but also real estate, hedge funds and even financial advisory services.

Of course, BX may not necessarily snag the Dell deal. If the valuation gets too high, the firm will undoubtedly back off.

But there will definitely be more Dell lookalikes that need the kinds of services that BX provides — precisely why the firm is likely to remain one of the world’s premier investors.

Tom Taulli runs the InvestorPlace blog IPO Playbook[16]. He is also the author of “How to Create the Next Facebook[17]” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders[18].”Follow him on Twitter at @ttaulli[19]. As of this writing, he did not hold a position in any of the aforementioned securities.

Endnotes:
  1. BX: http://studio-5.financialcontent.com/investplace/quote?Symbol=BX
  2. DELL: http://studio-5.financialcontent.com/investplace/quote?Symbol=DELL
  3. PBF: http://studio-5.financialcontent.com/investplace/quote?Symbol=PBF
  4. COP: http://studio-5.financialcontent.com/investplace/quote?Symbol=COP
  5. VLO: http://studio-5.financialcontent.com/investplace/quote?Symbol=VLO
  6. SUN: http://studio-5.financialcontent.com/investplace/quote?Symbol=SUN
  7. Pinnnacle Foods, which plans to come public this week: http://investorplace.com/ipo-playbook/pinnacle-foods-cooks-up-an-ipo/
  8. SAP: http://studio-5.financialcontent.com/investplace/quote?Symbol=SAP
  9. ORCL: http://studio-5.financialcontent.com/investplace/quote?Symbol=ORCL
  10. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  11. HPQ: http://studio-5.financialcontent.com/investplace/quote?Symbol=HPQ
  12. VZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=VZ
  13. CSCO: http://studio-5.financialcontent.com/investplace/quote?Symbol=CSCO
  14. EMC: http://studio-5.financialcontent.com/investplace/quote?Symbol=EMC
  15. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  16. IPO Playbook: http://investorplace.com/ipo-playbook/
  17. How to Create the Next Facebook: http://www.amazon.com/gp/product/1430246472/ref=s9_simh_gw_p14_d0_i1?pf_rd_m=ATVPDKIKX0DER&pf_rd_s=center-3&pf_rd_r=0GRB6ZMCTYDZVNG7Q7NV&pf_rd_t=101&pf_rd_p=470938811&pf_rd_i=507846
  18. High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders: http://goo.gl/pR2F3
  19. @ttaulli: https://twitter.com/ttaulli

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