RNFC – DELL TRANSACTION OVERVIEW

Dell: Leveraged Buyout, Fair Value & Delaware Court Ruling

Executive Summary of Events

On February 5th, 2013, private equity firm Silver Lake and billionaire CEO Michael Dell announced
their collective purchase of Dell Inc. through a leveraged buyout (LBO) at $13.75 per share. The
transaction rationale stemmed from Michael Dell’s optimistic view of the company’s shift from
hardware to enterprise solutions and services, and ultimately his opinion that the market just
“didn’t get” the company. At the time of the transaction, Dell traded at an unaffected share price
$10.881.

Although the transaction closed successfully in October that year, the deal was taken to the
Delaware court in March 2016 by unsatisfied shareholders to evaluate whether the $13.75
acquisition was in fact fair value. The court ruled that fair value was $17.62 per share, nearly $4
more than the purchase price, and ordered Silver Lake and Michael Dell to pay the difference to
all shareholders involved in the lawsuit.

Background Info to Transaction

In January 2013 with a potential acquisition of Dell in talks, the Dell special committee hired
Evercore to conduct a go-shop period, where other potential buyers were solicited to obtain the
highest bid. Following the go-shop period, Silver Lake and Mr. Dell remained the highest bidder
with total proceeds of $13.75 per share plus a 13-cent special dividend. Following several months
of conflict, shareholders voted in favour of the deal and the transaction closed on October 28,
2013.

Soon after, some of the former Dell shareholders sued Mr. Dell and Silver Lake on the grounds
that $13.65 was below fair value of the company. On May 31, 2016, the Delaware courts ruled
that the fair value of Dell at the time of sale was $17.62 per share – nearly one third higher. The
court ruling was based on what they deemed to be the fair value of the company.

While the transaction closed at $13.75, a fair value based on the LBO model, the value derived
from the use of a DCF and comparable companies, was materially higher. The court effectively
ruled that a DCF model is more reflective of fair value than an LBO and as such, utilized two DCF
models: one from the Mr. Dell’s defense ($16.43) and one from the shareholder’s prosecution
($18.81). The judge ruled fair value was an average of the two models, at $17.62 per share. Mr.
Dell and Silverlake were ordered to pay the difference of $3.87 per share, plus the legal rate of
interest compounded quarterly accrued on this amount, from the date of closing until the date
of payment.

LBO Overview
An LBO is the acquisition of a company using a significant amount of debt. A financial sponsor
(e.g. private equity fund) invests a small amount of equity, and uses leverage to fund the
remaining consideration. The use of leverage allows financial buyers to generate a sizeable

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internal rate of return (IRR) on their equity, usually 15%+ annually, over their investment horizon
(typically 3 to 7 years). In effect, buyers use LBO analysis to solve for the range of prices which
achieves their required IRR or hurdle rate, based on attainable levels of leverage.

Delaware Court Ruling

While the Company argued that the highest bid following a competitive process is the best
evidence of fair value, the Delaware court disagreed, indicating an LBO is not an appropriate
measure of value for the following reasons:

1. An LBO uses a required rate of return to back calculate equity value – this diverges from
fair value given the financial sponsor’s need to achieve benchmark IRRs to satisfy its own
investors2. It isn’t reflective of actual value the company generates from its cash flows.
2. The amount of debt available restricts valuation – LBOs are limited by the amount of
leverage the company can support and the sponsor can use to finance the deal3. This is
based on the company’s free cash flow profile, and overall market willingness to provide
the debt. A financial advisor involved in the sale process also indicated an LBO “would not
have been possible for the company” at $19 per share or greater as it “would require
leverage levels that you could not get in the marketplace”4.
3. The Dell sale process did not induce greater competition, due to the following reasons:
o All bidders were financial sponsors given lack of strategic buyer interest. Thus,
each bidder faced the same leverage constraints as Silver Lake and Michael Dell.
o The Winner’s Curse – given this was also a Management Buyout (MBO), a financial
sponsor would need to outbid Michael Dell, who as founder and CEO would have
the greatest insight into the Company’s value, raising concerns over information
asymmetry. Therefore, should someone place a bid which isn’t outmatched by
Michael Dell, you’ve suddenly learned you think the Company is worth more than
what management does.
o Hostile bids – formal bids would be competing directly with Michael Dell and thus,
likely interpreted as a hostile bid. Given private equity firms hope to work
alongside management in a friendly relationship, they actively avoid anything
which may be perceived as hostile. This suggests a superior bid is misaligned with
their investment strategy.

Steps in an LBO
1. Project EBITDA and cash flow available for debt repayment over the investment horizon,
based on various operating scenarios (see Dell Operating Scenarios)
2. Determine appropriate levels of leverage and debt structures which provide appropriate
credit statistics based
3. Estimate the exit price as a multiple of EBITDA, typically around the same as the entry
multiple

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4. Calculate the IRR and sensitize steps one through three

5. Solve for the entry price using your required rate of return, based on the above
parameters

As seen in Exhibit 1, the control panel in the model allows the user to toggle between various
operating scenarios, financing scenario and exit multiple, all of which lead into the IRR
calculation. In Exhibit 2, you can see how the various operating and financing scenarios actually
impact the IRR. Lastly, Exhibit 3 demonstrates how the key credit statistics change throughout
the projection period, based on our assumptions. It’s also worth noting for Step 5 that given we
already know the deal price, we aren’t solving for the equity price but rather assessing the
potential range of IRR’s Mr. Dell and Silver Lake may generate based on varying operating
scenarios.

Dell Operating Scenarios

The LBO model as described below, utilizes five operating scenarios to determine a range of
value. These are derived from three Boston Consulting Group (BCG) projections, an adjusted BCG
case, and a Bank case.

To assist with the sale process, BCG was hired to help forecast revenue, gross profit and EBITA to
serve as an independent basis for valuation in the model (Exhibit 4). BCG returned with three
operating cases: BCG Base, BCG 25% and BCG 75%.

BCG Base was more pessimistic than previous management reports, but in line with analyst
reports. BCG’s cases assumed Dell would realize 25% and 75% of the total $3.3B in cost savings
management outlined as their goal.

After completing their analysis, BCG believed the 25% Case was the most reasonable set of
projections. An additional “Bank Case” was built by Mr. Dell and Silver Lake for approaching banks
regarding debt financing for the deal. To be conservative, the model highlights a fifth case that
considered 95% of the BCG 25% Case (BCG 25% Adjusted).

Debt Funding
Exhibit 5 highlights the various types of debt used in the Dell transaction. The seniority of debt is
as follows: revolving credit facility (“revolver”), bank debt (consisting of term loans), high-yield
debt (subordinated notes), and mezzanine debt. As such, debt with more seniority is cheaper
given it’s greater restrictions, often secured to assets, and requires amortization, making the debt
much less risky for lenders.

The asset based loan (ABL) is a revolver with the bank. It has the cheapest rate of debt at LIBOR
+275bps, at a maximum of $2B based on a 5 year term. This facility allows Dell to drawn-down
the revolver when they need cash, and repay it when they have excess cash available.

Term Loan B, C and Euro Term Loans contributed about 23% of funding. While term loans are
cheaper than other types of subordinated debt, they have more onerous maintenance

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covenants. These covenants are tested quarterly and require the Company to maintain specific
performance metrics. In this deal, Term Loan C was cheaper than B, but required greater
amortization of 2.5% of original principal quarterly. Additionally, the euro term loans are
denominated in euros to fund appropriate expenses.

The transaction also established debt facilities with specifics purposes, including commercial
receivables, consumer receivables and Canadian commercial receivables. These facilities were
established to provide debt for specific working capital purposes. Given they are lower risk in
nature, establishing separate facilities for these purposes provides Dell with a cheaper cost of
debt.

The first lien notes of $1.5B are based on a fixed rate of 5.625%, meaning they aren’t subject to
movements in LIBOR, and have a bullet repayment due in 2020. They rank equal in right of
payment with all existing and future senior indebtedness and senior in right of payment to all
existing and future subordinated indebtedness.

The Microsoft subordinated note of $2B charges a fixed rate of 7.25% interest, and has a bullet
repayment due in 2023. Dell also has the option to pay 3.5% per annum in kind (PIK). Staggering
the maturity dates of this note and first lien notes, and having a PIK option provides a buffer for
Dell to generate cash flow in intermediate years.

Rollover Equity
Any pre-existing equity held by management which is held, or “rolled over”, to the proforma
capitalization is called rollover equity. This is important to note in the case of the Dell LBO, given
Michael Dell’s rollover equity position contributed 11.8% of total funding sources (Exhibit 6). He
also contributed additionally equity, 2.3% of sources, to fund the transaction. Private equity
funds often incorporate rollover equity into the transactions to ensure their incentives are
aligned with management, in addition to benefitting from management expertise.

Debt Repayment
In an LBO, a large portion of the financial sponsor’s return is generated through leverage to fund
the purchase, and paying off debt over the investment horizon. The model utilizes what’s known
as a “cash sweep”, whereby all excess cash is used to repay debt. As seen in Exhibit 7, excess cash
(cash available for optional debt repayment) is calculated by taking cash flow from operations,
less cash flow from investing (capital expenditures and acquisitions of intangible assets), less
mandatory debt repayments while maintain an appropriate minimum cash balance to sustain
operations.

In the case of Dell, capital expenditures and acquisitions of intangible assets are core the
business. They allow the Company to maintain their assets, and continuously develop their
product offerings. As such, we’d expect them to continue with these expenditures throughout
the investment horizon and have forecasted them as seen in Exhibit 8. Additionally, a minimum
cash balance is assumed in order for the company to sustain operations the following years. As
seen in Exhibit 9, this cash is used for working capital, restricted cash and tax purposes. Generally

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speaking, an assumed minimum cash balance is derived from their historical operations and cash
balances.

Return Analysis
As Exhibit 11 demonstrates, all excess cash flows to equity holders are accounted for in the IRR
calculation. Another key metric when analyzing LBO transactions is the multiple on invested
capital (MOIC), which is also reflected in this section.

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Exhibit 1 – Control Panel

Assumptions
LTM Date 2-Aug-13
Close Date 29-Oct-13
Exit Multiple 5.0x
Hold Period 7 years
Stub 50%
Marginal Tax Rate 21.0%
BCG 25% Adjustment 95.0%

Scenarios
Select
Operating Scenario 5 Bank
Financing Scenario 1 1
Data Table 1 On
Average Interest 1 On

Exhibit 2 – IRR Sensitivity

Silver Lake's IRR at $13.75

Financing Scenario
23.1% 1 2 3 4
1 9.82% 10.05% 11.54% 6.61%
Operating 2 18.72% 22.25% 22.73% 14.38%
Scenario 3 31.32% 35.00% 35.70% 24.19%
4 15.98% 19.58% 20.65% 12.41%
5 23.12% 26.00% 26.76% 18.39%

Exhibit 3 – Credit Statistics throughout Investment Horizon

Projection Period
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
SUMMARY CREDIT STATISTICS

% Debt to Total Capitalization 72.4% 67.2% 61.8% 56.0% 48.0% 40% 23%
EBITDA / Cash Interest Expense 3.9x 4.6x 5.2x 5.8x 6.7x 7.6x 10.3x
(EBITDA - Capex) / Cash Interest Expense 3.3x 3.9x 4.4x 5.0x 5.8x 6.5x 9.0x
EBITDA / Total Interest Expense 3.8x 4.5x 5.0x 5.6x 6.5x 7.3x 10.0x
(EBITDA - Capex) / Total Interest Expense 3.2x 3.8x 4.3x 4.8x 5.6x 6.4x 8.7x
Senior Debt / EBITDA 4.1x 3.5x 3.1x 2.7x 2.2x 1.8x 0.7x
Total Debt / EBITDA 4.6x 4.0x 3.5x 3.1x 2.6x 2.2x 1.1x
Net Debt / EBITDA 3.3x 2.8x 2.4x 2.1x 1.6x 1.2x 0.2x

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Exhibit 4 – Operational Scenarios from BCG Projections

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Exhibit 5 – Debt Funding

Sources
Multiple of % of
Source Pricing EBITDA Amount Total
New Debt
Term Loan B L + 350 1.5x 4,660 14.6%
Term Loan C L + 300 0.5x 1,500 4.7%
Euro Term Loans L + 300 0.4x 1,239 3.9%
ABL Facility L + 275 0.2x 750 2.3%
First Lien Notes 5.625% 0.5x 1,500 4.7%
Term/Commercial Receivables Facility L + 225 0.5x 1,600 5.0%
Revolving/Consumer Receivables Facility L + 225 0.2x 757 2.4%
Canadian Revolving/Commercial Receivables Facility L + 258 0.1x 165 0.5%
Microsoft Subordinated Note 7.250% 0.7x 2,000 6.3%
Existing Debt
Commercial Paper L + 225 0.0x 0 0.0%
Long-term Debt 5.000% 1.9x 5,900 18.4%
Equity
New Michael Dell Equity 0.2x 750 2.3%
Michael Dell Rollover Equity 1.2x 3,769 11.8%
New Silver Lake Equity 0.6x 1,875 5.9%
Cash
Cash from Balance Sheet 1.8x 5,520 17.3%
Total 10.5x 31,985 100.0%

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Exhibit 6 – Sources of Funding

Sources
Multiple of % of
Source EBITDA Amount Total
New Debt
Term Loan B 1.5x 4,660 14.6%
Term Loan C 0.5x 1,500 4.7%
Euro Term Loans 0.4x 1,239 3.9%
ABL Facility 0.2x 750 2.3%
First Lien Notes 0.5x 1,500 4.7%
Term/Commercial Receivables Facility 0.5x 1,600 5.0%
Revolving/Consumer Receivables Facility 0.2x 757 2.4%
0.1x
Canadian Revolving/Commercial Receivables Facility 165 0.5%
Microsoft Subordinated Note 0.7x 2,000 6.3%
Existing Debt
Commercial Paper 0.0x 0 0.0%
Long-term Debt 1.9x 5,900 18.4%
Equity
New Michael Dell Equity 0.2x 750 2.3%
Michael Dell Rollover Equity 1.2x 3,769 11.8%
New Silver Lake Equity 0.6x 1,875 5.9%
Cash
Cash from Balance Sheet 1.8x 5,520 17.3%
Total 10.5x 31,985 100.0%

Exhibit 7 – Breakdown of Cash Available for Optional Debt Repayment

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

2014E 2015E 2016E 2017E 2018E 2019E 2020E
Forward LIBOR Curve 0.58% 0.75% 1.32% 2.04% 2.68% 3.21% 3.63%

Cash Flow from Operations 1,449 2,887 3,277 3,647 3,764 3,771 4,086
Cash Flow from Investing -858 -1,761 -1,807 -1,861 -1,895 -1,929 -1,964
Cash Available for Debt Repayment 591 1,125 1,469 1,786 1,870 1,843 2,123
Total Mandatory Payments -501 -501 -501 -501 -1,251 -351 -7,081
Planned Dividends -372 0 0 0 0 0 0
Cash from Balance Sheet 815 0 0 0 0 0 0
Cash Available for Optional Debt Repayment 532 624 968 1,285 619 1,491 -4,959

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Exhibit 8 – Cash flow from Investing

Projection Period
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
2014E 2015E 2016E 2017E 2018E 2019E 2020E
Cash Flow from Investing:
Net Purchase/(Sale) of Investments 0 0 0 0 0 0 0
Capital Expenditures -286 -587 -602 -620 -632 -643 -655
Proceeds from Sale of Facilities, Land, and Other Assets 0 0 0 0 0 0 0
Purchase of Financing Receivables 0 0 0 0 0 0 0
Collections on Purchased Financing Receivables 0 0 0 0 0 0 0
Acquisitions, Net of Cash Received -572 -1,174 -1,205 -1,241 -1,263 -1,286 -1,309
Cash Flow from Investing -858 -1,761 -1,807 -1,861 -1,895 -1,929 -1,964

Exhibit 9 - Capital Expenditures and Acquisitions of Intangible Assets

Capital Expenditures
Historical Average Stub Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
% 50% 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Capital Expenditures 286 572 587 602 620 632 643 655
% of Sales 0.9% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%

Acquisition of Intangible Assets

Historical Average Stub Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
% 50% 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Acquisition of Intangible Assets 572 1,144 1,174 1,205 1,241 1,263 1,286 1,309
% of Sales 1.9% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%

Exhibit 10 – Minimum Cash Balance

Excess Cash
Total Cash and Equivalents 11,828

Cash as Working Capital 3,000

Restricted Cash 1,200
Liability from Unrecognized Tax Benefits 650
Minimum Cash 4,850

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Exhibit 11 – Returns Analysis

Ownership Percentage
SLP 32.2%
Michael Dell 67.8%

Equity Value
2020E EBITDA 4,981
Exit Multiple 5.0x
Implied Enterprise Value 24,903
Less: 2020E Net Debt 1,697
Implied Equity Value 23,206

Returns
IRR 23.1%
MOIC 3.5x

Equity Flows
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
2014E 2015E 2016E 2017E 2018E 2019E 2020E
SLP Equity -2,145
Michael Dell Equity -4,519
Equity Value on Sale 0 0 0 0 0 0 23,206
Net Equity Flows -6,664 0 0 0 0 0 23,206

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