Assume you are a private equity fund manager, and you are consider to invest in Dell at current year, write a paper to analyze and evaluate the company. Use the following materials and links as background and references. I also attached a sample note, wh

180

613011720ef68f45e_378e_4252_996f_b27692ef6fc8

2018

0613011729sample_ic_note x

Assume you are a private equity fund manager, and you are consider to invest in Dell at current year, write a paper to analyze and evaluate the company.

Use the following materials and links as background and references. I also attached a sample note, which you need to use it as the template of this paper, and a case related to Dell.

Sample Recommendation Note
https://www.forbes.com/sites/connieguglielmo/2013/10/30/you-wont-have-michael-dell-to-kick-around-anymore; Forbes, Oct 30, 2013
http://www.dell.com/learn/us/en/uscorp1/secure/acq-dell-silverlake, Oct 23, 2013, Official Website
https://dealbook.nytimes.com/2013/02/05/dell-sets-23-8-billion-deal-to-go-private/, NYT, February 5, 2013
https://www.fastcompany.com/3005689/why-dell-decid…
http://www.sec.gov Definitive proxy for Dell
Dell Inc Form S-1 from the time of the buyout announcement
Southeastern Asset Management Challenges Buyout at Dell; Harvard Business School, Product #: 114015-PDF-ENG

TNT

TECHNOLOGIES PRIVATE LIMITED

(TNT)

SAMPLE RECOMMENDATION NOTE

ALL INFORMATION IN THIS NOTE IS MADE UP –

FOR ILLUSTARTIVE PURPOSES ONLY

SINGAPORE

February 2018

TABLE OF CONTENTS

(1) Transaction Summary : 30

(2) Investment Thesis : 30

(3) Company Overview.. 34

(4) Business Plan : 47

(5) Financial Projections : 48

(6) Potential Risks : 49

(7) Valuation & Return Expectations : 50

I Transaction Summary :

Sector

Technology

(B2B) / Urban Development

Fund’s Transaction Size : up to US$ 15 mn

Instrument :

Equity Shares

/ CCPS

Valuation : $40 mn (pre-money)

Fund’s Equity

Stake

: up to 29%

Exit Timing : 54 months

Expected IRR : 35 % p.a

II Investment Thesis :

(1) Growing Awareness & Demand GIS

Solution

s :

The Geographic Information System (GIS) market is evolving from a distinct software market into a decision support technology. The map based visualization and real-time information exchange is transforming planning, research and development, deployment and monitoring.

While a lot of spatial data has been collected, only recently workflow and information management systems are being developed that are able to link and process spatial and non-spatial data for decision support systems.

Government continues be the largest consumer of GIS, for a multitude of applications and e-governance initiatives. Private players in the field of telecom, infrastructure development and retail have also started taking advantage of this technology.

The demand for GIS solutions seems favourable :

(a) … Provide reasons for the demand here.

(2) TNT Positon of Strength on Cost & Technology Parameters :

One of the biggest selling points for GIS Software as a Service (SaaS) is the potential to reduce IT support costs by outsourcing hardware and software maintenance and support to the SaaS provider. Moving GIS to the cloud is likely to prove more cost effective, flexible, and productive for organizations wishing to rapidly deliver new capabilities. Further, use of open source platforms is desirable as they are more likely to receive software support from multiple vendors.

While the GIS players have mainly used closed-ended platforms of companies like ESRI and Intergraph, that entail upfront high license costs, extensive hardware requirements, require software to be built on the platforms for the end-use requirements. Even then these products have been rigid to use due to the difficulty and limitations in the extent of customization.

TNT on the other hand has leveraged their founders’ extensive domain knowledge to create a proprietary technology platform, which is hosted on a cloud and customized for Asian use in the fields of property tax, water & sanitation, monitoring of structures like dams & bridges and survey of heritage sites. Other modules are being prepared. As these solutions don’t require any licensing cost and minimal hardware requirements, TNT offerings are 35-80% cheaper than the competitor offerings and can be deployed even in smaller areas where there are budget limitations.

The following is a snapshot of the bid details for the property tax assignment, where TNT got the contract :

Table 1 : Summary of Bid

Details

Item

Tender Quantity

Unit

Co. A

Co. B

Co. C

TNT

Technology

Autodesk

ESRI ArcGIS

Proprietary

Survey of Buildings

40,000

$ / Unit

180

538

275

Open Plot

8,000

$ / Unit
85

438

180
80

Software: Computerization

1
$

500

,000

145,000

800,000

500,000

AMC for Updates

48,000

$/ Unit

178

70
45

Web Application

1
$ / Unit

1,200,000

165,000

750

,000

500,000

Total

Bid Value

11,500,000

33,878,000

17,350,000

7,440,000

The interaction with the officers at the local municipality, indicates that the product is robust, easy to use, integrated with the workflow of the information management system and for the 31 areas where the work has been completed, there has been a detection of property tax violations that will increase property tax by 25%.

(3) Strong, Proven Capabilities :

(a) Property Tax : In a short period of time, TNT has successfully demonstrated its product with deployment of property tax modules across select wards of municipal councils. These wards have seen improvement in property tax collections by ~40%.

For instance, in Corporation of City of Area A it was found that 20% of the buildings were not in the records, 60% were not paying commercial taxes, 15% were not paying house taxes and 65% were not paying signage taxes. This helped increase property tax by over $ 7 mn in just one ward.

(b) Water & Sanitation : Institutions like Water Consultancy Services Limited (WCOS), and TEP University are using TNT’s solutions for conducting a thorough study of groundwater availability across seasons, survey and mapping of all major assets and pipelines of water supply & sewerage network and an interactive platform for viewing the project area with a decision support system for the civic officials.

Some of the assignments undertaken include :

(i) Ward C Municipal Corporation and Ward D Municipal Council in partnership with Advent

(ii) Water Department of Area F, and mapping for irrigation projects across City X and City Y with WCOS

(iii) Sewerage & sanitation surveys across Areas D and E with TEP University

(c) Monitoring of Civil Structures : TNT is working with Trent, a global monitoring solutions provider with local presence in 35 countries. Trent provides IoT sensors and TNT provides the software for computation, visualization and decision support. They are working together on a project in Africa, and evaluating other prospects like … (Give examples of pipeline).

(d) Heritage Buildings : TNT is working with AAIC to undertake the laser scanning and provide a web-based platform to visualize the data and implementation for the Capitol Complex.

As is evident from the above, leading domestic and international companies have chosen to work with TNT on various large and prestigious assignments covering diverse sectors. The Company has also built a strong pipeline of contracts aggregating $ 510 mn.

(4) Low Capital Intensity & Favorable Risk-Return Trade-off :

The Company offers software solutions on a SaaS platform that requires capital only to build the product while the direct variable costs are minimal. This results in low capital intensity and generates high return on capital with scale up. This is evident from the fact that the Company has been profitable since inception.

The Company requires capital to develop next level product capabilities. This investment will put the Company in a position to scale up to over $ 300 mn of annual revenues on a sustainable basis. At this level of revenues, the Company will generate

EBIT

margins of over

36%

and return on capital employed of over

100

The current round of funding coupled with internal accrual generation over the next few years will also strengthen the balance sheet to bid for larger contracts.

III Company Overview :

(1) Background : Founded in 2010, TNT provides services in the field of Geographic Information System (GIS) that include enterprise solutions, smart city solutions, municipal solutions, spatial data collection & application development and geospatial consultancy.

The Company is focusing on solutions in areas such as property tax, water supply & sanitation, environmental impact assessment, structural monitoring (dams, bridges, metro, heritage buildings etc), estate management, solar rooftop potential assessment, 3D mapping solutions, building plan approval and other location based data collection & monitoring services.

(2) Founders : The founders come with deep understanding of geospatial applications and the ongoing evolution of technology in a digitally connected world with influx of big data. The tie-ups with global players in the related fields and our primary interaction with various partners validates the same.

The profiles of the Founders are as follows : Here you could describe key management to build the idea that management is effective.

(a) Mr A….

(b) Mr B

(3) Shareholding Pattern :

Table 2 : Shareholding Pattern as on December 31, 2017

Name of the Shareholder

Equity Shares

Preference Shares

% Holding (fully diluted)

20052

–

41.23

B
20052
–
41.23

C
10

2,038

4.00

D
10

19,999

4.86

ESOP Pool***

4,446

–

8.6

Total

***ESOP pool to be created

(4) Snapshot of the Sector :

The Geospatial Information System (GIS) has been globally available for a few decades, but is still a relatively new and burgeoning field. It is only recently with the advancement in technology and digital applications becoming mainstream that adoption of GIS based applications has started gaining traction. The industry is far from mature and the traditional information management systems are not built to leverage the value of spatial information inherent in their data .

There are varied form of spatial data collection technologies that include aerial photography and satellite imagery, specialized sensors and metering systems, human surveys or direct collection of customer information. Further, a great volume of data exists in map libraries and historical data sets and archives. This data needs to extracted and processed to transform it into a desired format that can be used in a GIS. The process is difficult and often prone to significant quantitative and qualitative errors.

Spatial information comes in a broad range of often-proprietary formats and is contained in a number of frequently incompatible data management systems. This is particularly the case in government organizations that have historically had specialized systems developed for dealing with information they are mandated to collect and maintain, which has created a plethora of data sets maintained in obsolete and incompatible specialized systems. This leads to significant needs for processing of data into a cohesive data set that coincides spatially and minimizes errors in conversions or systems integration.

The next level of engagement requires a great deal of communication, training and awareness generation on the benefits and applications of GIS in becoming an active decision support tool. This involves understanding the operations of the organization, their problem areas, customers profile and state of their information management system, and accordingly customization of the GIS system functionality and user interface.

An example of a GIS system can be allowing an urban local body to establish a set of criteria viz. property price, end-use, age of property, adequacy of public conveniences etc., that would then provide them a list of properties and their property tax in a given area including maps of locations, house photos, tax incidence and compliance, aiding their decision making.

Table 3 : Overview of the GIS Sector

Tools

Aerial imagery, Electronic total stations, GIS, GNSS, LiDAR/Laser Scanning, Radar, Satellite imagery, UAVs/Drone

Application Areas

Assets and resource management, data acquisition and visualization, information systems, monitoring, planning and analysis, surveying and mapping

Benefits

Better precision and accuracy, enhanced data safety, security and control, faster decision making, improved cost efficiency, improved productivity, increased transparency and planning

Key Industries

Agriculture, Disaster Management, Electricity, Forest, Environment and Climate Change, Infrastructure, Urban Development, Water Resources

(5) State of GIS in Asia :

The outreach of geospatial technology in many countries has been dismal with city administrations for tax management and their day-to-day operations. Some of the key reasons have been due to piecemeal solutions offered by established geospatial technology players – either surveys or applications. Comprehensive solutions starting from data collection to data management to technology platform were not marketed well. Further, the administrations do not have dedicated IT teams or consultants or staff having technical understanding. Hence in the absence of a comprehensive solution, the data or applications remain largely unused.

Some of the key issues include :

(1) There is no national GIS or national DEM yet available in many countries.

(2) There is acute shortage of large scale geospatial data.

(3) The small-scale geospatial data are not up to date.

(4) There are no or very few national standards available for geospatial activities.

(5) It is common that several large and small infrastructural projects get delayed and lead to cost-escalation due to poor input of geospatial data and solutions.

(6) Lack of geospatial data and solutions imposes limitation on running successful disaster management operations.

(6) Company’s Service Offerings :

TNT’a service offering include end-to-end GIS solutions covering different modes of data collection, data management and software that includes workflow management, GIS based queries and functions, visualization and a customer friendly user interface.

The Company has developed specialized technologies for spatial data collection (location based information) that includes use of mobile apps during survey, terrestrial/mobile/aerial LiDAR (light detection and ranging), unmanned aerial systems (drones / UAV), IoT (Internet of Things) sensors etc.

The geospatial data is processed in its proprietary technology platform built on open source with specialized object sets, compliant with the Open Geospatial Consortium (OGC) Standards. The technology platform enables processing of varied data formats in a spatially enabled manner.

The hyperlocal information system is equipped with workflow management, intelligent visualization and easy-to-use interface that makes it one of the most user friendly GIS systems available. It can be integrated into the Enterprise Resource Planning (ERP) modules, or used as a SaaS platform (Software as a Service), or used as a standalone product with dedicated servers.

The typical process workflow for a GIS solution is as follows :

Table 4 : Typical Process Workflow

Project Initiation

Requirement analysis / user profiling

Data Creation

Physical surveys, import from CAD layouts, GPS based data collection, UAV/LiDAR surveys, listing of Sensor, Sensor location mapping

Data Management

Database creation, linking with non-spatial data and sensor data streams

GIS System

Creation of online Smart GIS Management System, which is integrated with the ERP and enables business analytics and customizable workflow

(7) Positioning & Differentiation :

The GIS space in Asia has many small and large players who focus on varied sectors and specialties. Some of the large players are …… The other small and mid-size players active in the field are ……

The players predominantly use close-ended platforms of global players like ESRI and Intergraph, build GIS solutions upon it for domestic customer requirement. As they have to rely on such platforms, the solutions are rigid, expensive and deployed only by large administrations and large sized companies.

TNT has developed its own cloud based platform that eliminates or simplifies many of the difficulties and bottlenecks faced in the service offerings of the global platforms. While its proprietary design hosted on the cloud enables it price its solutions 35-80% lower than competition.

Some of the key differentiating factors are as follows :

(a) Technology Platform : ESRI technology and Intergraph suite have been the most popular GIS products in Asia so far. However both are global companies and their local resellers just sell the enterprise licenses without offering customized solution and an end-to-end offering. As a result, many digitization initiatives have failed to take-off post survey of properties.

Existing product suite of ESRI, Intergraph, etc. require a server room and hardware, dedicated database server, administrator (DBA), customization team and continuous administration engagement in development process. In each instance there is difficulty in customizing taxation rules. This results in high cost levels for implementing GIS solutions.

TNT’s proprietary technology built on open source platforms and hosted on the cloud is combined with mobile workflow for geospatial mapping and workflow for property tax data with automated linking of spatial and non-spatial data to buildings and premises. This enables TNT to provide floor-wise visualizations and offer pay-as-you-use or annual licensing models.

Table 5 : TNT vs

ESRI/Intergraph

technology platform

ESRI/Intergraph
TNT

Requires a server license to be purchased which goes up to $ 5 mn

No server license required

Expensive due to extensive hardware, server room, dedicated database server, administrator (DBA) and customization requirements

Cloud based platform that eliminates majority of these costs, as result the cost drops by 35-80% over the peers

No mobile integration for data capture

Globally, ESRI data collector has been surpassed by young companies like Terrago, which excel in mobile based data collection

TNT’s mobile data collector works on a technology which is more modern than the technology used by ESRI

Seamless mobile integration, which helps in easy transfer of spatial and
non-spatial elements to web server for automated processing

Mobile app talks well with external GPS receivers through Bluetooth for improving spatial accuracy of data collected. Compliant with standard DGPS hardware from companies like Trent, Satlab, EOS, etc

Workflow needs to be configured

Seamless, customized workflow – already developed for property tax, sanitation

(b) Survey Capabilities : Proper data collection capturing both spatial and non-spatial elements is critical in developing an accurate, reliable GIS system. TNT has developed in-house survey capabilities with democratized tools for low-end GIS data collection using android phones, lasers and door-to-door data collection, as well as modern capabilities consisting of UAVs, Terrestrial LiDAR for building scanning and mobile LiDAR for street mapping. This helps collect accurate information at lower costs. Amongst the competitors, only MapGlobal has in-house survey capabilities, but it uses vehicle mounted street-mapper cameras with a focus on creating navigational solutions. All other companies outsource survey work.

(i) TNT is focused on providing integrated and affordable GIS solutions, which can be offered even for small ticket assignments.

(ii) Other companies have a greater focus on navigational database creation. They work on the ESRI platform and have no focus on city administrations.

(iii) MapGlobal is a data company offering Address PoIs and applications built on them. They use the ESRI platform and have no focus on city administrations.

(iv)

Company R

is an IT systems company with large scale managed GIS services. They work on Geomedia platform and have a focus on large city administrations and Smart City programs. Property Tax is not a part of their key offerings.

(v) Other MIS systems such as KDMC etc : They focus on basic MIS workflow and clerical work, working on basic SQL based query systems. They focus on smaller ticket state mandates.

(8) Market Size &

Customer

Segments :

The Company has identified City Administrations as one of the largest addressable segments that will also generate positive social footprint with assistance in tax compliance and urban development.

Government at all levels collect and manage information that has spatial components. Typically, this information is not maintained in a spatially enabled manner and is thereby not utilized efficiently or effectively in decision-making processes. All levels of government; local, state or district, can use GIS technology in virtually every department or agency. This is due to the fact that the topics of their attention are related to jurisdiction and government duties. These applications include natural resource management, land use planning, law enforcement in case of litigations, health services, insurance analysis, emergency planning and response.

The immediate areas where TNT has focused its attention in developing solutions, for both government and private entities, are as follows :

(a) Property Tax : Property Tax accounts for about 30-35% of a city administrations revenue. However, the collection efficiency in the 36 large cities stands is only 63%, in the range of $ ~45 bn as against revenue potential of $ 63-94 bn. Based on research findings, if the property tax collection efficiency is increased to 85%, there is a potential to increase property tax revenues to $ 12 bn.

Presently, the city administrations databases to generate property tax bills are predominantly outdated and do not capture all the properties. The attempts to carry out comprehensive survey for updating the records have fallen short, but the challenges can be addressed with use of technology. The processes for generation of demands and monitoring of property tax compliance is also not automated, leading to further shortfall in collection.

TNT offers a solution of surveying properties using mobile app and laser range finders, integrated with web enabled geo-visualization platform, MIS generation, run queries and analytics for decision making. The solution has a unique offering of floor-wise visualization with on-premise data and photographs.

TNT has undertaken property tax projects in cities such as …., and successfully rolled out the GIS platforms which have increased the property tax revenues in these municipalities by over 40%.

The Company has identified an addressable market of 2,061 city administrations in Asia These consists of 95 mn properties, having a revenue potential of $ 20 bn from the property tax module.

(b) Water Supply & Sanitation : Water resource management is affected by multiple factors like population and economic growth, pipeline leakages, pollution, non-revenue water, climate change etc. The water works departments find it difficult to manage in the absence of timely insights on these factors.

There is increasing focus on creating sustainable solutions for water supply, irrigation and sanitation. The exercise includes thorough study of groundwater availability and quality across seasons and factors affecting them, as well as modelling for future scenarios. The study and analytics necessitates use of technology including geospatial study and visualization.

TNT has developed a Water Supply and Sanitation solution that is a combination of a GIS database, an operating system and an asset management module. It includes survey and mapping of all major assets and pipelines of water supply & sewerage network and an interactive platform for viewing the project area with a decision support system for the civic officials.

The Company has implemented its solution at …….

There are over 6,

600

blocks in Asia with each having ~15 wards (administrative unit that manages the water resources). The company estimates an average contract value of $

0.6

mn per ward translating to a market opportunity of $ ~6 bn.

(c) Heritage Buildings : The Archaeological Society of Asia has been allotted a budget of $ 2 bn in 2017 for the conservation and preservation of cultural monuments in the country. In addition, UNESCO World Heritage supports the conservation of 50 cultural world heritage sites in Asia.

Heritage conservation is a niche field of architecture and engineering, requiring precise data on the existing status of the structure that includes cracks and imperfections. Laser scanning is a widely used technology in the developed countries to scan the structures in three dimensions using laser point cloud. It documents monuments in as-is where-is condition. Cracks and damages to the structures are captured exactly through 3D point clouds. This helps in preparing the conservation design and rehabilitation programs.

TNT leverages terrestrial laser scanning technology to scan heritage buildings and has a distinct advantage over the prevalent manual processes in Asia. The accurate reading help anticipate possible future damages to the structure. A pre-restoration and
post-restoration laser scanning exercise helps compare changes brought about by the restoration process. TNT then helps the customers visualize the laser point cloud data by providing an interface where they can view, measure and plan their activities. 3D point cloud capability is an important feature of this solution.

The company estimates an average contract value of $

0.7

mn per monument translating to a market opportunity of $ 6 bn.

(d) Structural Monitoring of Dams, Bridges & Civil Works : Monitoring the measurement of motion over time plays a vital role in project safety and management. For infrastructure, construction projects and natural structures, it’s important to understand what is moving, and by how much to better understand its structural performance and to predict its durability and remaining lifetime. Monitoring provides the information needed to support safe, economical and efficient operation of projects and structures.

TNT partners with Trent, a global monitoring solutions provider, to provide a comprehensive structural health monitoring system for dams and bridges. In a monitoring project, the use of geodetic, seismic, geotechnical and other sensors provides periodic observations of objects to detect physical changes such as unusual stress and strain, cracks and other deteriorations which occur due to factors such as loading, corrosion, fatigue, temperature and time. At user-specified intervals, the sensors take measurements to determine any changes in position, length or tilt. When the expansion/contraction properties of a geotechnically instrumented body are known, the additional use of prisms/GNSS to also monitor the position-related changes greatly enhances the quality control of the monitoring system.

(e) Other Segments : The Company has been active in providing solutions to other segments as well, such as :

(i) Estate Management.

(ii) Solar Rooftop potential assessment .

(iii) GIS solutions : assignments executed for Insurance, Highway Projects and Micro-Finance.

(iv) Building Plan Approval (to be introduced in 2018).

(9) Alliances & Strategic Tie-ups :

To implement GIS application and decision support systems in the city administrations requires a degree of educating them with regards to what GIS is, how it can be utilized, and what benefit/role it can play. A major task lies in the area of demonstrating the utility and cost effectiveness of implementing well integrated GIS systems. Accordingly, a large part of the business development of the Company goes towards educating the city administrations on cost and benefits of GIS implementation.

While the Company is working with various city administrations, there still exists a wide spectrum of applications and use-cases both with government agencies and the private sector that the Company’s limited marketing team is not able to tap into. TNT has started working with multiple strategic partners for business development and joint bidding. Give some examples here.

IV Business Plan :

(1) Capability Enhancement : With an eye to the expanding acTEPance and implementation of GIS solutions in Asia, requirement of customization and to leverage the evolving applications of technology, the Company has identified the following areas for capability enhancement over the next few years :

(a) Build local language support and translation APIs.

(b) Improving architecture to enable handling of large size images (satellite / drone images), quicker loading and image processing.

(d) Sensor integration / Internet of Things (IoT) capabilities.

(e) SAP integration.

(f) Desktop Data Creation.

(g) Integration of various modules (property tax, water & sanitation, estate management).

(2) Expansion & Diversification : With the customized solutions for City adminstrations developed, the Company will focus on adding features to the solution to enable ongoing engagement, as well as look to leverage its GIS platform to build solutions for new segments both in the public and the private sector.

(a) Property Tax Module : enhance features like payment and collection module for mobile app – to enable updation of payments at the time of collection, automated changed detection module to identify new construction, more robust MIS, enhanced security features and support for ultra-high resolution imagery (drone-based imagery).

(b) PPP based

Revenue

Model for Property Tax : revenue earned to be a fixed percentage of increased revenues for ULB.

(c) Water Supply Systems : build a complete hydraulic model from source to destination (house connections), which will enable the ULB to monitor the system, ascertain water supply at critical junctures, limiting the leakages and plugging non-revenue water component. The application is intended to work with flow meters, quality sensors and devices to give real time data and visualization.

(d) Utilities Module : this will help analyse and manage assets, reduce non-revenue usage, enable door-to-door management, consumer indexing of utilities and provide analytics for improving operational efficiency.

(e) Building Plan Approval Module : SaaS solution for real estate developers to submit their building plans (designs and layouts) to the ULB or Estate Management Authority for approval. Once approved the ULB staff can monitor progress and integrate it with the Property-Tax module for property tax management.

(f) Estate Management Module : improved asset management practices – demarcating the lease areas, linking geographic features to lease information, assessment details and planning new lease areas.

V Financial Projections :

The financial projections have been prepared based on the business plan and equity infusion taking place by December 2017.

Table 6 : Financial Projections

($ mn)

2014

2015

2016

2017P

2018

2019

2020

Revenue

6.7

11.2

1.6

52.8

124.0

2.9

1,2

24.9

Direct Expenses

0.6

0.8

1.4

18.3

4.3

5.4

318.6

Sales & Marketing

0.0

0.0
0.0

4.6

2.4

97.4

158.1

G&A Expenses

4.6

7.7

7.9

18.9

0.3

9.8

304.5

EBITDA
1.4

2.7

2.2

10.9

-32.9

0.2

443.6

EBITDA (%)

22%

24%

19%

21%

–

27%

34%

36%

Depreciation

0.3

0.5

3.1

14.0

24.9

45.0

EBIT

1.1

2.2

1.8

7.8

-47.0

5.3

398.6

Finance Expenses

0.1

0.1
0.1
0.2

0.4

2.4
4.3

PBT

1.0

2.1

1.7

7.6

-47.4

202.9

4.4

PAT

0.7
1.4
1.1
5.3
-47.4

142.2

276.3

PAT (%)

10%

13%

10%
10%

-38%

21%

23%

Networth

5.8

7.2

12.8

118.1

70.7

212.9

489.1

Debt

2.4
0.6
0.4
0.4
0.4
0.4
0.4

GFA

2.7
2.9
3.1

12.4

60.2

121.2

233.8

Net Working Capital

1.6
4.3
7.7

7.5

19.4

126.9

232.1

CF from Operations

3.7

-0.9

-1.8

8.6

-44.8

59.8

216.1

CF from Investments

-0.8

-0.2

-9.3

-47.7

-61.1

-112.6

CF from Financing

1.5

-1.9

4.2

100.0

0.0
0.0
0.0

Free Cash Flow

4.3

-3.0

2.2

99.3

-92.6

-1.2

3.5

Cash Balance

5.2

2.3

4.4

103.7

11.1

9.9

113.5

ROCE (%)

27%

52%

24%

66%

-125%

155%

137%

ROE (%)

16%

22%

11%

-50%

100%

79%

Some of the salient features :

(1) The Company has sustained focused on profitability and operational cash generation since inception.

(2) Survey and other direct expenses form about 30-35% of revenue. Accordingly, as the revenues grow, working capital requirements are not expected increase in the same proportion.

(3) The Company needs to quickly strengthen its technology team to build solutions for the nascent but expanding business from City adminstrations and private enterprises, as well develop solutions for the Smart City Programs. The sales and marketing team needs to be built as well. This results in high operational expenditure and operational loss for a year.

(4) The Company already has built up an active pipeline to the tune of
$ 75 mn, which are at various stages of discussion. This provides good visibility for next two year revenue projections.

(5) Low capital intensity and highly scalable business, thereby providing high return on capital with expansion in subsequent years.

VI Potential Risks :

(1) Lack of management bandwidth : The Company is presently over-reliant on the Founders for marketing, as well as product evolution.

Mitigant : Post funding, the Company plans to build a strong management team. The Company currently has a 20 member team and an ESOP framework in place. It has identified key institutions to recruit fresh talent, advisors, consultants and talent who can accelerate the growth.

(2) High dependence of government tenders: Presently, 60-80% of the revenues are from property tax module that is awarded by City adminstrations through competitive tenders. There is an inherent risk of delays in award of contracts or losing the contracts to peers.

Mitigant : To de-risk, the Company has initiated strategic marketing tie-ups that will reduce its reliance on property tax module, as well as government tenders. While some of these tie-ups have yielded results but the Company needs to continue its marketing efforts and diversify its client base and user industries in order to mitigate the cashflow risk.

(3) Competitive Intensity for Large Contracts : For large sized contracts such as Smart City Programs or from the City administrations of the large 36 cities, there is participation from all large cap companies with revenues of over $ 500 mn. The Company may likely face bottlenecks qualification criteria or skepticism as the Company is yet to execute any contract for a large city administration.

Mitigant : TNT has implemented their solution in diverse GIS applications for reputed partners, which provides validation to the Company technical ability and ability to execute large contracts. With this round of funding, the Company will also have the balance sheet to meet the financial criteria to bid for large contracts.

VII Valuation & Return Expectations :

(1) SaaS Valuation Benchmarks :

TNT is a SaaS Company offering multidisciplinary geospatial solutions and specializes in using GIS and GPS information for solving problems of businesses across different sectors and civic bodies to make them smart in all respects. Multiple metrics from various sources have been evaluated to benchmark the entry valuation for investment in TNT.

Table 7 : Global SaaS Valuation Metrics

Details

Revenue Multiple

Source

Multiple on annual recurring revenue by

Investor

6.8x

2013 study from Pacific Crest Advisors

Long term median valuation multiple on LTM revenue (revenue growth rate of 28% and median EBITDA margin of 5%)

Capital IQ, Catalytic Investors, June 2016

Multiple in strategic acquisitions

Redpoint, 2016

Valuation study by Software Equities Group

7.3x

Cultivation Capital, February 2015

High-growth public companies

6-12x

Crunchbase, January 2016

The median multiples of over 50 SaaS companies from CY2004 to CY2015

4-6x

Report- What We Know From A Decade Of SaaS, June 2015

The Saas Index for public market multiples is graphically shown below :

Chart 1 : EV/Revenue Multiples vs TTM Revenue Growth

Source : Software Equity Group, LLC

Chart 2 : EV/Revenue Multiples vs TTM EBITDA Margins

Source : Software Equity Group, LLC

The charts depicts that the highest growth SaaS companies received median of 7.4x EV/Revenue multiple and the most profitable SaaS companies posted a median of 6.1x EV/Revenue multiple, which was a 22% premium over the Index median of 5.0x .

(2) Listed Asian Companies with some exposure to GIS :

Listed companies are active players in the GIS space, but they are large IT companies with other segments forming a larger part of their revenues. While strictly not comparable, their multiples are provided as reference point :

Table 8 : Trailing 12 Month Valuation Multiples of Listed Companies

Details

TTM EV/Sales

TTM EV/EBITDA

Last 3 year revenue growth rate (%)

Company P

9.8

29.3

-31%

Company Q

4.2

17.1

2%

Company R

1.3

3.5

30%

(3) Past Fundraising by TNT : The Company has raised two rounds of funding in the past. Details of which are as follows :

Table 9 : TNT’s Past Fundraising

Investor

Date

Amount

Stake

EV/Sales (x)

Tech Partner

Jul 2013

$ 2 mn

5.01%

8.5

Incubator A

May 2015

$ 2.5 mn

4.0%

5.4

(4) Proposed Transaction : The Fund will invest up to $ 100 mn at a pre-money valuation of $ 245 mn for a 29% equity stake in the Company. Based on FY2017 expected revenues of $ 52 mn, the pre-money valuation comes to 4.7 times EV/Sales.

Fund B is also contemplating an investment of up to
$ 30 mn in the Company. In the event Fund B commits to invest $ 30 mn, the investment amount committed by the Fund will reduce proportionately.

(5) Exit Planning : The Company has successful deployed solutions across property tax, water & sanitation, estate management, heritage sites, insurance companies, Micro-finance industry and monitoring of large civil structures. With the current round of funding, the Company will have the balance sheet strength to bid for larger orders and take the growth path to the next level. This next phase of growth will also entail moving up the value chain with strong IOT capabilities and enhanced features of its multi-functional GIS platform.

Driven by adoption of modern technology, Govtech is emerging as a promising field across Asia and the world that can transform public governance to deliver the outcomes desired by its citizens. Accordingly, it became one of the major segments attracting venture capital with US$ 336 mn invested across 41 transactions in CY2016. The funding to this sector has registered a growth of 305% CAGR from CY2012 to CY2016

(a) Secondary / Strategic Sale : Over the next five years, we expect TNT to emerge as major player operating in the Govtech segment, with proprietary technology platforms and solutions that can be replicated across other disciplines in Asia and overseas. Apart from the venture/private equity investors, the Company will also be an attractive M&A target for large strategic players looking to acquire capabilities and presence in the segment

The increasing investor universe and the number of transactions the sector provides confidence that an exit can be consummated well within the Fund’s estimated holding period of 54 months

(b) Drag Along with escrow mechanism : In the event an exit is not achieved by the Fund by way of a secondary sale or a strategic sale within 54 months of investment, the shareholder documentation will also include Drag Along rights for the Fund. In such an event, the Promoters agree to offer such stake from their holding as required to effect a sale. Further, to safeguard the Funds right, the shares held by the Promoters shall be kept in escrow

(6) Return Estimation : Considering that there are challenges associated with government contracts, such as prolonged sales cycle and payment related issues, the revenue achievement may get delayed. Given below are return estimations which factors various levels of delay and underachievement of revenues and EBITDA for a 54 month holding period :

Table 10 : Return Estimation

Revenue (` mn) à

750
600
500

EBITDA (` mn) à

195

144

100

EV/EBITDA (x)

4.5x / 40%

3.3x / 30%

2.3x / 20%

5.6x / 47%

4.1x / 37%

2.9x / 27%

6.7x / 53%

4.9x / 42%

3.4x / 31%

(7) Other Key Investment Terms :

(a)One Board Seat and one Observer Seat.

(b)Valuation Protection.

(c)Tag Along Rights.

(d)Liquidation Preference.

(e) Veto rights over all major decisions, capital structure, business plan, expansion, diversification, appointment / change of auditors, appointment / removal of key management etc.

VIII Recommendation:

TNT provides the Fund an attractive opportunity to invest in the high growth Govtech sector with a player having strong domain expertise and proprietary technology that have been validated by both domestic and global players.

The current state of City administrations indicate absence of bespoke, usable solutions, while the geospatial consortium NGCC have brought to attention an acute shortage of expertise and skillsets in the GIS space. With such a backdrop, TNT will emerge as a strong GIS player offering full stack solutions. The Company is now looking to raise funds to build capabilities for the large contract space and operate alongside industry leaders.

The Fund should consider an investment of up to $ 15 mn in TNT Technologies Private Limited (TNT). In the event the Fund decides to pursue this opportunity, the following next steps are envisaged:

(1) Accounting and legal due diligence.

(2) Shareholder documentation.

Annexure – 1

Summary of the feedback calls with customers, partners and others

Organization

Contact Person

Feedback

Mr….

§ Working jointly on IOT Platform and mapping assignments

§ Spoke highly about TNT and the Founders’ domain expertise and customized solutions

§ Preferred Partner : Jointly working on DRIP, Metro, Heritage and Irrigation Projects

E
Mr….

§ Has a Land ERP, takes TNT solutions for Data Collection and Mapping Platform for projects in Africa

§ Spoke highly about the Founders’ domain expertise

§ TNT’s solutions are agile and able to drill down deep to provide customized solutions

§ TNT’s pricing 40-50% lower than ESRI, while the product was of very high quality

F
Mr….

§ Proptery Tax module was implement in select wards

§ User friendly and the ULB benefited

§ Will give TNT more wards to implement GIS solutions post elections

§ Will recommend the Company to others

G
Mr….

§ Founders are prompt and forthcoming, experienced and service oriented

§ Working with TNT for Water Projects in Indonesia

H
Mr….

§ Delay in implementation because of change in scope

§ Like the organisation and the founders

§ Data for 31 wards has come and has detected non-compliance of 25%

§ Very easy to use software, with site photos and floor wise data that makes extremely useful to issue property tax notices

I
Mr….

§ GovTech expert has validated the TNT’s Product from technology standpoint. He used to run a GIS company prior to joining ON

J
Mr….

§ Preferred vendor status

§ ACR continues to engage with TNT for all its water projects.

Annexure – 2

Select List of Assignments Undertaken

S. No

Customer
Solution
Sector

Contract Value ($)

Annexure – 3

Order Pipeline

Sr No

Customer

State / Geography

Scope

Work Brief

Estimated Contract Value*

2,000,000

4,500,000

3,500,000

200,000

3,000,000

61,250,000

4,000,000

43,750,000

3,400,000

3,500,000

11

1,750,000

78,750,000

12,500,000

17,500,000

Annexure – 4

GIS Industry Overview: Business Segments and Opportunities

Sample – Details of the Industry can be inserted in a 4-5 pg report here.

9 – 1 1 4 – 0 1 5

R E V : M A Y 2 , 2 0 1 7

Professors Paul Healy and Suraj Srinivasan and Senior Case Researcher Aldo Sesia (Case Research & Writing Group) prepared this case. It was
reviewed and approved before publication by a company designate. Funding for the development of this case was provided by Harvard
Business School and not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as
endorsements, sources of primary data, or illustrations of effective or ineffective management.

Copyright © 2014, 2017 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-
7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized,
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P A U L H E A L Y

S U R A J S R I N I V A S A N

A L D O S E S I A

Southeastern Asset Management Challenges
Buyout at Dell

Michael Dell and Silver Lake both had the kind of numbers on the company that we did, which is of course
the reason they wanted to take Dell private. We said over and over, “It’s not about the PC!”

— Staley Cates, president and CIO,

Southeastern Asset Management

In October 2013, Staley Cates, president and chief investment officer at Southeastern Asset
Management Company, reflected on events of the prior ten months. Southeastern had been in a fierce
battle with Dell Inc.’s board to prevent Michael Dell and Silver Lake Partners, a private equity firm,
from taking Dell private. Several shareholder votes had been cancelled just as Southeastern seemed
poised to win the battle. But in the end, on September 12, 2013, Dell’s shareholders approved the
transaction and Southeastern lost their dissident campaign. Cates and his colleagues were frustrated
with the outcome and wondered what, if anything, they should have done differently.

Southeastern Asset Management

Southeastern Asset Management was founded in 1975 as a 100% employee-owned independent
investment advisory firm that aimed to employ a value investing approach to long only equity
investing “with a long-term time horizon in strong businesses with good people at deeply discounted
prices.”1 By 2013 the company, led by CEO and founder Mason Hawkins and Cates, had
approximately $31 billion of assets under management, and offices in Memphis, London, Singapore,
and Sydney. Both men liked to play up the firm’s physical, if not philosophical, distance from Wall
Street.2

The firm’s Longleaf Partners funds provided opportunities for institutional investors to invest in
focused portfolios, large- and small-cap U.S. stocks, and international stocks. Since inception, the
Longleaf Partners Fund (focused on large-cap U.S. stocks) had generated an average annual return of
11.5% (versus 9.6% for the S&P 500 Index), the Longleaf Partners Small-Cap Fund had an average
return of 11.4% (versus 10.0% for the Russell 1000), and the Longleaf Partners International Fund had
generated an average return of 9.4% (versus 5.1% for the MSCI EAFE Index).3

Southeastern’s team of ten research analysts was charged with identifying “individual companies
that were misunderstood, underfollowed, temporarily challenged, or intensely disliked.”4 All

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114-015 Southeastern Asset Management Challenges Buyout at Dell

analysts at the firm scrutinized the resulting stock recommendations to determine which 18 to

would make the most attractive investment opportunities. Richard Hussey, chief operating officer
and principal, explained the company’s investment approach:

We look for securities that we believe are fundamentally mispriced, that are good
businesses run by capable management. Everything we do is predicated on trying to
close that gap between the current market price and what we deem to be the intrinsic
value of the company. We don’t get involved in micromanaging the company’s
operations, but we do spend time understanding what the business is doing and suggest
to management how to allocate capital more effectively.

Southeastern was known for its conservative long-term approach to investing and for working
with the management and boards of companies in its portfolio to improve their business results, but
it was not shy about becoming more actively engaged. For example, in 2012 Southeastern took a lead
role in publicly advocating for change at Chesapeake Energy Corp., a natural gas company, in which
it held a 13.6% stake. As a result of declining performance and persistent questions about its CEO and
corporate governance, Chesapeake’s shares were down 41% since Southeastern began building its
stake in the company six years earlier.5 Southeastern’s activism and the accompanying media
scrutiny prompted the board to strip the CEO of the chairman’s position and eliminate the program
that allowed the CEO to borrow money from the company to buy an interest in wells Chesapeake
drilled. Eventually Southeastern and Carl Icahn won seats on the board and other independent
directors were also added. “The clear impression we had was that Mason [Hawkins] was a long-term
investor, and he wasn’t a breakup artist. It gave us a real sense of commitment,” said one former
board member.6

Cates joined Southeastern as an analyst in 1986 after graduating from the University of Texas. He
became president of the company in 1994, and co-managed the firm’s Longleaf Partners funds. In
2006, Cates was awarded Morningstar’s Domestic Equity Fund Manager of the Year along with
Hawkins. In addition to his work with Southeastern, Cates was an active social entrepreneur in the
Memphis community, co-founding and leading several Christian-based youth and education
initiatives, and helping to attract the NBA franchise Memphis Grizzlies.

Dell Inc.

Michael Dell started Dell from his dorm room at the University of Texas, Austin in 1986. By
bypassing the middleman and selling custom-built computers directly to customers, Dell became the
number one computer systems manufacturer (primarily personal computers, or PCs) in the world in
2001.7 In March 2004, Michael Dell stepped down as CEO, but remained the firm’s chairman.

By 2005, PC rivals had closed the efficiency gap with Dell and were enjoying resurgent sales at
retail stores.8 In 2006, for the first time since its founding, Dell grew more slowly than the overall
market and rival Hewlett-Packard overtook Dell as the largest PC manufacturer.9 Further, Dell
seemed slow to react to the move to more mobile computing. In January 2007, Michael Dell returned
as CEO, and set out to transform the company from a PC maker to an enterprise solution and services
(ESS) provider of software, networking, data storage, and security to large companies.

To accelerate its transformation, Dell embarked on a series of acquisitions. The largest of these was
the September 2009 $3.9 billion acquisition of Perot Systems, seller of a wide range of business IT
services. In building its ESS business, Dell spent more than $13 billion on acquisitions since fiscal year
2008. As a result, 34% of Dell’s $56.9 billion in 2013 revenues came from ESS compared to 24% in

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Southeastern Asset Management Challenges Buyout at Dell 114-01

2009. This increase came at the expense of the PC segment whose share of revenues declined from
59% in 2009 to 50% in 2013 (See Exhibits 1a, 1b, and 1c for Dell’s income statement, balance sheet,
and cash flow statement, Exhibit 2 for Dell’s business segment revenue, and Exhibit 3 for business
segment performance of HP Inc., a competitor to Dell.)a Yet despite this progress, Dell’s five-year
stock performance lagged the broader market. For the five years ending January 1st 2013, Dell had
underperformed the Nasdaq Index by over 65%.

Dell first showed up on Southeastern’s list of undervalued stocks in 2005. Southeastern’s analysis,
Cates explained, showed “a gap between price and value” because the market was not recognizing
the transformation taking place at Dell. “Over time we attributed less than 20% of our value of Dell to
the PC business,” Hussey noted. “We did underestimate how fast and how violent an impact the
decline in the PC business would have on Dell’s intrinsic value; that said, we recognized the
company’s transformation while the marketplace continued to fixate on the PC business.”

Lee Harper (HBS ‘89), Southeastern’s head of client portfolio management, explained, “Over the
years we had discussions with Dell’s management on how to tell their story more effectively; how to
get out the word that in fact it was transforming. It had a growing and profitable enterprise business.
That Dell was not just a PC company any longer. But the message never got out there as we hoped.”

As a result of its analysis, Southeastern began accumulating Dell stock. By January 2013, it had

bought 146 million shares in Dell at a total cost of $2.4 billion, around $16.66 a share.10 With Dell’s
stock price continuing to languish, Cates and his team devised a more ambitious plan to unlock its

potential value. On June 15, 2012, Cates contacted Michael Dell to suggest the possibility of taking the
company private and allowing shareholders who did not want the immediate liquidity such as
Southeastern to participate in such a transaction. He provided an example of how Southeastern and
Michael Dell could roll over their shares (that is, they would substitute their shares in Dell for

in the private company) and take Dell private along the lines of how Clear Channel had essentially
gone private with a small number of remaining owners. After Southeastern provided additional
information to Michael Dell over the next few weeks, he responded that he would think about the
idea.11 Michael Dell and Southeastern spoke again in July and then had no further discussions.

Taking Dell Private

In August 2012, Michael Dell informed Dell’s board of directors that he wanted to join forces with
a private equity firm to take the company private in a leveraged buyout transaction. The board
quickly formed a special committee of four independent directors led by Alex Mandl to consider the
matter (see Exhibit 4 for their bios). In the fall, the special committee retained J.P. Morgan and Boston
Consulting Group (BCG) to review proposals and strategic alternatives for the company.12 The scope
of BCG’s work included analysis of the future of the PC business, prospects for Dell’s transformation,
and financial cases to model various sensitivities around possible cost savings targets. (See Exhibit 5
for a summary of BCG’s analysis.)

Michael Dell had met with private equity firms Silver Lake and Kohlberg Kravis Roberts (KKR) to
discuss each’s interest in partnering with him on a take-private transaction. Both firms with Michael

a Prior to February 2013, Dell had four business segments, based on customer type (Large enterprise, Public, Small and
medium business, and Consumer). In its 2013 annual report, Dell announced that it was changing its business segments based
on the types of services offered (Enterprise servers and networking, Services, Software and Client), and reported sales for the
new segments.

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114-015 Southeastern Asset Management Challenges Buyout at Dell

Dell submitted preliminary offers to the board on October 23, 2012. Silver Lake offered $11.22 to
$12.16 a share, with Michael Dell rolling over his 16% equity stake in the company.13 KKR proposed a
deal for $12 to $13 per share, with the expectation that Michael Dell and Southeastern would join the
offer and that Michael Dell would contribute an additional $500 million.14 However, in December,
KKR dropped out of the process, citing its unease “with the risks [. . .] associated with the uncertain
PC market, and concerns [. . .] regarding the competitive pressures the company faced.”15 A few days
later, Mandl contacted a third private equity firm, but it quickly dropped out with “concerns about
the negative trends in gross margins and earnings in the PC business [. . .].”16

Michael Dell’s Strategic Rationale

Michael Dell contended that Dell’s transformation could not take place as a public company. (See
Exhibit 6.) In a presentation to investors he explained:

[T]he Company’s transformation is still in its initial stages. Significant incremental
investment is required [. . .] to restore the Company to health in the long term. In the
short term, however, [these investments] are likely to lower gross margins, raise the
Company’s operating expenses and raise capital expenditures, resulting in lower
earnings [. . .]. Taking these actions as a public company could adversely affect Dell’s
stock price. A continuing decline in public share price would threaten to adversely affect
customer perception and make it more difficult to retain employees. As a public
company we must take a more cautious approach to our transformation because we
must consider how our stock price will react [. . .]. This hurts the speed and efficacy of
the transformation and is not good for the long-term health of the company.

Risky transformation has a higher probability of success as a private company. Given
the market environment facing the Company, the significant investments and aggressive
steps the Company needs to take entail significant risk [. . .] As a private company
owned by two financially strong equity investors, Dell will be better able to aggressively
pursue its long-term business strategy and thereby increase the speed and likelihood of
success. Private owners [. . .] will be able to absorb the risks of the transformation and
the likely near-term adverse effects on earnings. Financially strong equity owners have
the resources to provide additional capital if needed. As a private company, stock price
fluctuations will no longer be a concern.1

The Transaction Structure and Price

In January 2013, Michael Dell/Silver Lake increased their offer to $13.65 per share of common
stock for a total of roughly $25 billion, about $28 billion including transaction costs.18 This
represented a 25% premium on Dell’s closing share price on January 11, 2013, when rumors of the
transaction hit the market.19 Many business news outlets had carried the story within a few days.

To fund the deal (see Table 1 below), Michael Dell and Silver Lake planned to borrow $13.75
billion from banks and an additional $2 billion from Microsoft Corp. Microsoft’s involvement was
largely seen as a defensive move to maintain Dell’s commitment to the Windows operating system.

Silver Lake planned to put in $1.4 billion, and Michael Dell and his wealth management firm would
contribute $750 million. The remainder was to be paid for with $7.4 billion of Dell Inc.’s cash, all but
$500 million of which was held by foreign subsidiaries. At the 35% U.S. corporate tax rate,
repatriation could result in a tax bill as high as $2.6 billion. In addition, Michael Dell would swap 273
million of his Dell shares valued at $13.36.

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Southeastern Asset Management Challenges Buyout at Dell 114-0

Table 1 Proposed Deal Financing

Source
Amount

($ billions) Comments

Debt $13.75 Including loans and revolving credit facilities

Dell Inc. cash 7.40 $6.9B held by foreign subs, subject to 35% U.S. corporate tax rate

From Microsoft Corp 2.00 7.25% unsecured subordinated notes

Cash from Silver Lake 1.40

Cash from Michael Dell 0.75

Total $25.30

Source: Dell Inc. Schedule 14A, May 30, 2013,
http://www.sec.gov/Archives/edgar/data/826083/000119312513242115/d505470ddefm14a.htm, accessed April 7,
2014.

On February 5, 2013, Dell’s board released an announcement saying that it had accepted the
Michael Dell/Silver Lake offer (see Exhibit 7 for the full board announcement). The deal, however,
required the approval of holders of a majority of outstanding shares, excluding shares held by
Michael Dell or certain members of Dell’s management team and board. If approved, it would be the
biggest buyout since the Blackstone Group’s $26 billion takeover of Hilton Hotels in the summer of
2007.

Southeastern’s Reaction

On February 5, one week prior to the board’s announcement of the buyout offer, amidst market
rumors of an impending deal, Southeastern and its outside counsel met with Mandl and expressed its
opposition to any deal in the range of $14 or $15 per share that did not allow existing large
stockholders to roll over a portion of their equity interests into the new company.22 Southeastern
believed that Dell’s long-term stockholders had funded the successful transformation from a PC to an
ESS business and should, therefore, be given the opportunity to benefit from their investment.

Critiquing the Strategic Rationale

Although Southeastern had approached Michael Dell about taking Dell private, the firm did not
believe going private was necessary for the company to make a successful transformation to an ESS
business. It offered examples of firms such as Apple, IBM, and Philips that underwent significant and
successful transformations as public companies. Apple was able to make major R&D investments and
build an integrated ecosystem as a public company—taking its market capitalization from $1.7 billion
(2007) to $658 billion (September 2012). Lou Gerstner’s decision as CEO of IBM to exit mainframes
and PCs for software and services required transforming a legacy culture. Southeastern indicated that
public companies such as Nokia and Kodak had failed to transform because of a continued focus on
legacy products, while Dell had spent more than $13 billion on acquisitions to build its ESS
business.23 (See Exhibit 8 for more of Southeastern’s critique of the buyout proposal.)

Southeastern pointed to the seven potential take-private value levers that BCG identified and
concluded that Dell could use most of them even if it remained a public company (see Exhibit 9).
Southeastern argued that sophisticated investors, such as pension and hedge funds and investment
firms like itself, were quite capable of absorbing the risks associated with a conservatively leveraged
balance sheet that would be necessary to continue Dell’s transformation.

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114-015 Southeastern Asset Management Challenges Buyout at Dell

Critiquing the Transaction Structure and Price

With its 8.4% stake, Southeastern was Dell’s largest outside investor. “We’re not opposed to
companies being taken private, but we want it at a fair price,” Harper explained. “We don’t want it
stolen from us. Just because you don’t think you’re getting a fair deal doesn’t mean you want to
spend the time, effort and dollars to fight it. But, we thought that there was enough chance of
improving our outcome and our client’s outcome that it was worth the fight.”

On February 8, 2013, Southeastern sent a letter to Dell’s board expressing its “extreme
disappointment” in the offer:24

[We believe] modest valuations of Dell result in per share valuations vastly in excess
of the $13.65 offer price. Net cash per share after deducting structured debt within Dell
Financial Servicesb (DFS) is $3.64. [DFS] has a book value of $1.72 per share. In addition,
since [. . .] 2007, the Company has spent $13.7 billion or $7.58 per share on acquisitions
intended to transform the Company into a sustainable IT business and lessen its reliance
on the PC business. [In June 2012, Dell’s CFO said] in aggregate the acquisitions [. . .]
had delivered a 15% internal rate of return. [. . .] We therefore conservatively believe the
acquisitions are worth a minimum of their cost.

Southeastern added that its own valuation indicated that Dell’s shares were worth $23.72 (see
Table 2 below). As a result, it vowed that it would vote against the deal.

Table 2 Southeastern’s Dell Inc. Valuation

Value Assumptions

Net cash $3.64 Cash and equivalents/investments of $14.2B less total debt of $7.6B

Dell Financial Services 1.72 DFS book value

Acquisitions since 2008 7.58 Cash spent on acquisitions, net of cash acquired, since FY 200

Server Business 4.44 $8B of revenue & $880M of operating income excluding acquired

businesses

Support and Deployment 3.89 $4.8B of revenue and $1B of operating income

PC Business 2.78 $27B in revenue and $1.3B of operating income

Software and Peripherals 1.67 $9B in revenues and $450M in operating profit

Unallocated Expenses -1.00

DFS embedded in businesses -1.00

Total $23.72

Source: Southeastern Asset Management, Schedule 13D, filed February 8, 2013,

http://www.sec.gov/Archives/edgar/data/807985/000094787113000078/ss164605_sc13d.htm, accessed Sept. 16, 2013.

Southeastern was convinced that analysts were not valuing the ESS business correctly and that
they were also overlooking Dell Financial Services, which, according to Cates, was worth a few
dollars per share. Moreover, Southeastern had a different take on the $7.4 billion in cash Dell held at
its foreign subsidiaries. “The sell-side just dismissed the offshore cash in its valuations,” Cates
offered. “They said the cash is trapped. But Dell could pay U.S. tax and bring it back at say 65% of
value. If that was not palatable, you could consider Dell using the money for a foreign acquisition to
add value.”

b Founded in 1997, Dell Financial Services provided customer financing of products and services sold by Dell through
consumer and small business revolving loans and fixed-term business loan and lease financings in the U.S. and Canada.
Source: https://dfs.dell.com/Pages/AboutDFS.aspx, accessed January 24, 2014.

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Southeastern Asset Management Challenges Buyout at Dell 114-015

On making the Southeastern valuation public, Hussey observed:

There is an incredible reluctance for institutional money managers to say anything
publicly in these kinds of deals. We talked to other long-term shareholders who had
similar values. They just weren’t going to go public with their analysis. We put our
value out there. Some people would say you shouldn’t do that because you’re putting a
bull’s-eye on yourself, but for us it was all about principle. It’s what we thought it was
worth, it’s what we told our clients it was worth, and we were fighting for our clients.

“When we first put out our appraisal, our lawyers, PR people and even some inside the firm
worried that making our valuation public exposed us to attack,” Cates noted. “But we said we know
how to appraise and it is the linchpin of our case; so put it out there and let others challenge it.”

Southeastern was not the only investment firm opposed to the deal. T Rowe Price Group Inc., the
second-largest outside investor in Dell, made its position known on February 8: “We believe the
proposed buyout does not reflect the value of Dell and we do not intend to support the offer as put
forward,” said T. Rowe’s chairman and chief investment officer.26 Reuters reported that other
institutional shareholders opposed to the deal included Harris Associates, Yacktman Asset
Management, and Pzena Investment Management, which together held 3.3% of Dell’s outstanding
shares. Pzena’s chairman, Richard Pzena, said Dell’s stock was worth more than $20 per share.27

Go-Shop

The Michael Dell/Silver Lake agreement included a 45-day “go-shop” period during which Dell’s
special committee would consider offers from other parties. The go-shop period would run through
March 22, 2013, after which negotiations would continue if a potentially “superior proposal”
emerged. A superior proposal meant a bona fide written acquisition proposal that the board
determined in its good faith judgment (after consultation with outside legal counsel and its financial
advisor) was more favorable to Dell’s stockholders than the Michael Dell/Silver Lake buyout offer.28

If Dell’s board accepted an offer from a competing bidder during the go-shop period, the
company would pay Michael Dell/Silver Lake a termination (or break-up) fee of $180 million. This
would increase to $450 million if a bid was accepted outside the go-shop period.c,29 However, Hussey
explained, the “go-shop” period was unlikely to lead to a serious competing bid:

The reality is you had 45 days to do the diligence. To be considered in the realm of a
superior proposal you had to have financing in place, without contingencies. But the
board would not entertain an offer that would use the company’s cash to help finance
the deal. A levered recap such as we proposed would not be considered an “alternative”
by the board because unless you had control of the company, the board said you don’t
have control of the cash, so you can’t use it. Of course, to get control, you’d have to run a
proxy slate to elect your own board members which is antagonistic towards the current
board.

Cates added:

c From 2008 to 2012, termination fees in the U.S. were between 3.3% and 3.5% of deal value. Source: Houlihan Lokey, “20

Termination Transaction Fee Study,” p. 6, June 2013, http://www.hl.com/email/pdf/2012-HL-transaction-termination-fee-
study , accessed January 16, 2014. Study used data from Thomson Reuters.

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114-015 Southeastern Asset Management Challenges Buyout at Dell
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Even if you could put together an alternative offer, you’d pay $100 million to $200
million in commitment fees to the banks if the board rejected your offer. Lenders charge
commitment fees because they lock up their balance sheet for the amount you want to
borrow. This was not a worry for Michael and Silver Lake because they had a break-up
fee as part of their agreement with the board; so if in the end their offer was rejected
they would cover their expenses and would be out nothing. It was highly unlikely that
another private equity firm would make a hostile offer with a founder CEO. In addition,
many strategic buyers whom we spoke with were interested in owning pieces of the
company, but they did not want or were unable to buy the whole company.

In early March, within the go-shop period, activist investor Carl Icahn revealed he had a
“substantial,” undisclosed ownership stake in Dell and that he disapproved of the take-private
transaction, essentially joining Southeastern in the fight against the buyout. “Icahn and Southeastern
have rarely been co-investors in the same stock,” Harper said. “We have different models. We always
go into a company thinking there are good management partners there; while Carl typically wants to
change management or improve governance.” Icahn called for Dell to pay a $9 per share special
dividend. In a March 5 letter to the special committee, he wrote:

[W]e propose that [. . .] in the event that the [Michael Dell/Silver Lake offer] is voted
down by shareholders, Dell will immediately declare and pay a special dividend of $

per share comprised of proceeds from the following sources: (1) $4.26 per share, or $7.4
[billion], from available cash as proposed in the [Michael Dell/Silver Lake offer], (2)
$1.73 per share, or $3 [billion], from factoring existing commercial and consumer
receivables as proposed in the [Michael Dell/Silver Lake offer], and (3) $4.26, or $5.25
[billion] in new debt.

We believe that such a transaction is superior [. . .] because we value the proforma
“stub”d at $13.81 per share using a discounted cash flow valuation methodology based
on a consensus of analyst forecasts. The “stub” value of $13.81 combined with our
proposed $9.00 special dividend gives Dell shareholders a total value of $22.81 per
share, representing a 67% premium to the $13.65 per share price proposed.

We hope that this Board will agree [. . .]. This would avoid a proxy fight.30

The Blackstone Group, the world’s largest private equity firm, showed interest during the go-shop
period and on March 22 made a $14.25 a share offer to buy Dell. But before the board determined if
Icahn’s or Blackstone’s proposals were superior (the only two submitted), Blackstone withdrew its
offer, concerned with “an unprecedented 14% market decline in PC volume in the first quarter of
2013, its steepest drop in history [. . .] and the rapidly eroding financial profile of Dell [management
revised its operating income projections for the fiscal year from $3.7 billion to $3.0 billion].”31

With Blackstone’s bleak assessment of the PC market and Dell’s prospects, some analysts
wondered whether Michael Dell and Silver Lake could lower their bid or use the Blackstone
assessment to sway Southeastern and other large shareholders to vote in favor of their $13.65 per
share offer.

d Stub referred to the remaining value of a share of stock after the special dividend was paid out. Prior to the payout, the stock
price reflected the future dividend payout; once the payout was made the stock price dropped.

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Southeastern Asset Management Challenges Buyout at Dell 114-015
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Alternative Proposals

After the go-shop period Southeastern remained steadfast in its opposition to the take-private
transaction. On May 5, Southeastern and Icahn co-wrote the special committee proposing that Dell
pay shareholders a special dividend of $12 per share in cash or $12 in additional shares valued at
$1.65 per share. They believed their proposal was superior to the take-private offer that they dubbed
the “Great Giveaway.”32 In their letter the two dissidents argued:

It does not take a mathematician to understand that $12.00 in cash and a stub equity
component with [. . .] significant upside operating potential is superior to only $13.65 in
cash.33 We are often cynical about corporate boards, but this board has brought that
cynicism to new heights [. . .]. The company is poised for a rebound in its fortunes, one
that [we] fear [will] be enjoyed only by Mr. Dell and Silver Lake if their bid succeeds.34

“Our goal all along was to put a credible leveraged recapitalization alternative on the table for
shareholders to vote on,” Hussey said. Southeastern noted that the special committee’s ownership
interest in Dell was only 0.1% of all shares outstanding.

Days later, Southeastern and Icahn notified the company that they intended to each nominate six
new directors to Dell’s board. On the same day, the special committee requested more information on
the Southeastern/Icahn proposal: “[it] is not clear to us whether you intend to formulate your
transaction as an actual acquisition proposal that the Board could evaluate and potentially endorse or
accept or rather to propose it as an alternative that the Board could consider in the event the pending
sale to Silver Lake and Michael Dell is not approved.”35

On May 16, Dell reported disappointing first quarter fiscal year 2014 results. Earnings per share
were $0.21 (a 51% year-over-year reduction)36 versus analysts’ expectations of $0.35.37 One analyst
believed Dell had sacrificed profit by reducing prices to help move PCs, servers and other products
during the quarter.38 For the first time, the company reported segment results for ESS and End User
(PC) segments. ESS reported sales of $3.1 billion and operating income of $136 million, which
represented a 10 percent increase and 71 percent increase respectively over the same quarter the of
prior year. The End User segment had sales of $8.9 billion and operating income of $224 million,
representing a 9 percent decrease and 65 percent decrease respectively over the same quarter of the
prior year. (Segment information for competitor HP Inc. is in Exhibit 3.)

With a special stockholders’ meeting scheduled for July 18, 2013 to take up the Michael
Dell/Silver Lake offer, Southeastern and Icahn needed to convince other shareholders to first oppose
the deal and later, given that it had become clear that Michael Dell and the board opposed a
leveraged recap, vote for the alternative slate of directors at the annual shareholders meeting
scheduled for October 7, 2013. In a move designed to increase acceptance of the recap, Southeastern
sold 72 million of its Dell shares at $13.52 each to Icahn. The transaction increased Icahn’s holdings to
9%, making him the second largest shareholder behind Michael Dell.39 Hussey explained the sale:

We wanted to provide shareholders with a viable alternative to the Michael
Dell/Silver Lake proposal. For it to be a credible alternative, we needed more financing.
Carl was able to cobble together the necessary financing without having to go the
banks—thereby avoiding the millions in commitment fees which we would have been
required to pay the banks whether or not we were successful in getting shareholder
approval for a leveraged recapitalization.

As Dell’s second largest shareholder, Icahn penned a new proposal to shareholders on June 18:

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114-015 Southeastern Asset Management Challenges Buyout at Dell

We have also come to the conclusion that [the board . . .] will never accept our
[earlier] proposal as a Superior Proposal [. . .]. As a result, and in order to settle all
questions regarding liquidity, we propose that Dell engage in the $14 per share tender
offer described below. In order to implement our tender offer proposal we will: (1) seek
to defeat the Michael Dell/Silver Lake transaction at the July 18 Special Meeting . . . and
(2) once the Michael Dell/Silver lake transaction is defeated, seek to elect our slate of
directors at the 2013 Dell annual meeting of shareholders to implement our proposed
$14 per share tender offer.

We propose that Dell commence a tender offer for approximately 1.1 billion Dell
shares at $14 per share (for a maximum of $16 billion available in the tender offer). Icahn
and Southeastern (who together hold approximately 13% of Dell’s shares) will agree not
to tender in the tender offer. Our proposal allows those who believe, like us, that the
$13.65 price being offered in the Michael Dell/Silver Lake going private transaction
significantly undervalues Dell, to continue to hold Dell shares. It also provides an
opportunity for those who wish to tender at $14 a share to do so, with the knowledge
that they will be able to sell at least approximately 72% of their position, and possibly
more if other shareholders do not fully subscribe to the tender offer. Funding for the
tender offer would be provided from $5.2 billion of debt financing, together with $7.5
billion in cash available at Dell (after taxes and payment of fees) and $2.9 billion
available through a sale of Dell receivables.

Icahn said this proposal would leave approximately $4.9 billion of cash on Dell’s balance sheet for
ongoing Dell operations. And according to Southeastern, this latest self-tender proposal would result
in a maximum Net Debt/EBITDA or leverage multiple of 1.7x, well below the Michael Dell/Silver
Lake multiple.

Challenges to the Southeastern/Icahn Proposal

On June 24, Dell’s special committee made a presentation to investors explaining why the Michael
Dell/Silver Lake offer was reasonable and that the Southeastern/Icahn proposal lacked credibility
and had a potential $3.9 billion funding shortfall. The special committee said that Icahn had not
secured committed financing for any of his proposals and had failed to provide the key provisions
and mechanics, which the committee had requested. It also questioned why Southeastern sold shares
to Icahn for less than the bid offer and reiterated that in its opinion a leveraged recap was high risk—
it would add debt to a deteriorating operating performance and have a potential adverse impact on
employees, vendors and customer perceptions.40 At an investor presentation in June, Michael Dell
supported the special committee’s concern about a leveraged recap, stating it would add “substantial
debt while leaving the company as a public company [. . .]. [It] would leave the company [. . .] with
all of the issues that make it more difficult, slower, and riskier to accomplish the company’s necessary
transformation.”41

On leverage, Cates said:

The special committee and Michael were saying that the Southeastern and Icahn
proposals were too dangerous because it would increase Dell’s financial leverage. We
countered that with the take-private transaction, Dell Inc. would be super-leveraged.
What we heard back was “You just can’t be leveraged as a public company when you’re
competing with all these other tech companies that have net cash on their balance
sheet.” The argument was that customers would be worried about dealing with the
company if it had too much debt. We felt that was nonsense because customers care

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Southeastern Asset Management Challenges Buyout at Dell 114-015

about the product and services they are buying, not how much net cash you have. But if
true, wouldn’t that hold for a private company too?

Furthermore, Southeastern pointed out that, for those concerned with the company’s leverage
under the recap proposal, BCG had projected that Dell could realize more than $3 billion in cost
savings with certain initiatives which would fall to the bottom line and help pay off the debt.

Southeastern’s and Icahn’s proposal faced a further challenge since it was not clear to
shareholders who would run Dell under their scenario. Cates explained:

This was an issue for some investors. They worried that we were just financial
players and had no idea how to run Dell. We were painfully aware of that concern. We
had a CEO with incredible industry credentials and name recognition lined up. He did
not want his name released before the deal was approved because he thought that being
part of a dragged-out proxy fight would cast criticism on him and inevitably damage his
stature with employees and customers, making it difficult for him to lead Dell should
we win the proxy. We had to keep his name out of the deal fray to preserve his
effectiveness as a CEO if we won, but we had the Dell board and ISS saying our
proposal should not win because we had no CEO to run the company.

On June 27, in a presentation to Dell’s shareholders, Southeastern pointed out that “Michael
Dell and Silver Lake would not be pursuing a take-private transaction unless they thought it
was a good deal for them.”42 It reiterated that Dell did not need to be a private company to
successfully transform to an ESS business.

Michael Dell/Silver Lake got a boost on July 7, when Institutional Investor Services (ISS), a
leading proxy advisory firm, backed their plan to take Dell private. ISS explained, “there is
compelling evidence [. . .] that the business equation undergirding the transformational strategy [. . .]
is deteriorating rapidly.”43 ISS added, “From a public company shareholder’s perspective, if your
chief executive is willing to buy your falling knife for the privilege of catching it, there is probably a
price at which you should let him.”44 Glass Lewis and Egan-Jones, two other proxy advisory firms,
also endorsed Michael Dell/Silver Lake.

Five days later, on July 12, Icahn and Southeastern again increased their alternative proposal,
sweetening the deal for Dell’s shareholders in an effort to persuade them to vote against Michael
Dell/Silver Lake. “Under our revised proposal, Dell would self-tender for 1.1 billion shares of Dell
stock in exchange for $14 per share plus one transferable warrant for every four shares purchased in
the self-tender offer,” they wrote. “Each warrant would entitle stockholders, for a period of 7 years, to
purchase a Dell share for $20.”45 They argued this proposal implied that each share was worth
between $15.50 and $18.46 (Exhibit 10 highlights all the Southeastern/Icahn proposals.)

Voting

On the morning of July 18, 1.1 billion shares had been voted with 579 million for and 563 against
Michael Dell/Silver Lake. And according to the rules set by the board, the 334 million shares that had
yet to vote would be counted as “no” votes, if they remained uncast.47 With defeat almost certain, the
board abruptly postponed the meeting until July 24.

One day before the rescheduled special meeting, Michael Dell/Silver Lake increased their offer by
$0.10 per share to $13.75 and proposed a one-time $0.13 per share dividend, provided the voting rules
were changed so that abstentions would not be counted as “no” votes and that the record date (the

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114-015 Southeastern Asset Management Challenges Buyout at Dell
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date by which shareholders had to have held shares to be eligible to vote) be changed from June 2 to
August 13. “This would allow more arbs [arbitrageurs] to vote,” explained Cates, “and they are
interested in a quick gain, not in the long term viability of the company.”

With this revised offer, valued at about $24.9 billion, the vote was once again suspended, pushed
out to August 2. On August 2, the special committee announced that it had entered into a revised
definitive merger agreement with Michael Dell/Silver Lake that increased the aggregate value to
shareholders by at least $350 million. In addition to the increase in the purchase price and the special
dividend, Michael Dell/Silver Lake would also pay a third quarter dividend of $0.08 per share, which
the board valued at $120 million. The special committee announced that the company’s voting
standard had been modified to satisfy the Michael Dell/Silver Lake contingent offer, and again
postponed the special meeting, this time from August 2 to September 12. Cates remarked:

Changing the rules was the only way they could win the vote. The original offer
stated that the provision to count the non-votes as votes against the deal “shall not be
waivable,” yet the board waived this condition, essentially changing the outcome, for a
mere $0.10 per share. To further ensure that the deal passed, the board did not send
new proxy materials to enable voting by those who originally had abstained with the
intent to defeat the deal. Dell’s original proxy materials and subsequent communications
had told shareholders that failing to vote would have the same effect as voting against
the deal, but once that was no longer true, people did not receive a revised solicitation.
The board considered it the ultimate evil to hand the keys over to “corporate-raider”
Carl Icahn.

Yet Icahn continued to fight on. He filed a complaint against Dell Inc. and its board seeking to
prevent changes in the voting rules. If a new record date was permitted, Icahn wanted the court to
insist that Dell also hold the annual meeting at the same time, in which case Icahn would try to
replace the board. He also sought “(1) a declaration that the Dell Board breached its fiduciary duties
to the stockholders by, among other things, adjourning the Special Meeting on July 24 without also
scheduling the Annual Meeting at the same time, (2) to enjoin the company from changing the
stockholder voting requirements in the Merger Agreement, and (3) damages from Dell and its
directors for any losses caused by Dell and its Board.”48 Michael Dell responded that the complaint
was “grandstanding.”49

On August 15, Dell announced that its second quarter net income was 72% lower than the same
quarter the prior year, while revenue was flat.50 The next day, August 16, the court dismissed Icahn’s
complaint, stating: “There is no apparent reason to believe the special committee is acting from any
reason other than that the meeting scheduled is in the best interests of Dell stockholders.”51

Shareholders Approve the Deal

The ruling was a fatal blow to Southeastern and Icahn’s fight to defeat the take-private
transaction. On September 9, Southeastern released a statement saying:

We are grateful for the strong support we received from our fellow Dell stockholders
[. . .] as we fought diligently on their behalf. Indeed, prior to the Special Committee’s
decision to change the voting standard, the Michael Dell/Silver Lake transaction did not
receive the required stockholder approval on three separate occasions. While we
continue to oppose the Michael Dell/Silver Lake freeze-out transaction, given the new

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Southeastern Asset Management Challenges Buyout at Dell 114-015

record date, the new stockholder base, the modified voting standard and the Boards
refusal to combine the Annual Meeting and Special Meeting [. . .], Southeastern and
Icahn will not pursue additional efforts to defeat the transaction. Though we continue to
believe that our proposal is superior [. . .] we are pleased that our efforts contributed to
the modest increase [. . .] Dell stockholders will receive.52

The September 12 meeting went ahead as planned, and shareholders approved the sale of Dell to
Michael Dell and Silver Lake for approximately $24.9 billion. On October 29, Dell stopped trading on
NASDAQ. (See Exhibit 11 for a summary of key events.)

Reflections

As the portfolio managers of Southeastern reflected on the outcome of the ten-month battle, they
remained convinced that the Michael Dell/Silver Lake deal had not been in the best interests of the
firm’s shareholders. But, Hussey observed, “there is always a healthy amount of skepticism when a
company is trying to reinvent itself from a legacy business to a new business via acquisition or
organically. Going into territories where they haven’t played before raises doubt and that absolutely
played into shareholders’ decision making.” Reflecting on what took place, Cates observed,

We knew fighting the board’s decision, coming out with our own valuation,
opposing Michael Dell would be challenging to say the least. But we felt it was the right
thing to do. We thought we could generate an outcome of around $20 a share for our
clients. It is very frustrating because the votes were there to defeat the take-private
transaction in July, if only the board had not changed the rules.

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114-015 Southeastern Asset Management Challenges Buyout at Dell

Exhibit 1a Dell Inc.’s Income Statement, 2009 to 2013 (in $ millions, except per share data)

Fiscal Year

2009 2010

2011 2012 2013

Revenue $61,101 $52,902 $61,494 $62,071 $56,940

Cost Of Goods Sold 49,998 43,404 50,041 48,211 44,687

Gross Profit 11,103 9,498 11,453 13,860 12,253

Selling General & Admin Expense 6,966 6,465 7,302 8,524 8,102

R & D Exp. 665 624 661 856 1,072

Other Operating Expense, Total 7,631 7,089 7,963 9,380 9,174

Operating Income 3,472 2,409 3,490 4,480 3,079

Interest Expense (93) (160) (199) (279) (270)

Interest and Investment Income 180 57 47 81 100

Net Interest Expense 87 (103) (152) (198) (170)

Currency Exchange Gains (Loss) 115 (59) 4 5 (18)

Other Non-Operating Inc. (Expense) (58) 12 (13) (6) (18)

EBT Excl. Unusual Items 3,616 2,259 3,329 4,281 2,873

Restructuring Charges (282) (237) (57) (49) (67)

Merger & Related Restruct. Charges 0 0 72 0 0

Gain (Loss) On Sale Of Investment (10) 2 6 8 35

EBT Incl. Unusual Items 3,324 2,024 3,350 4,240 2,841

Income Tax Expense 846 591 715 748 469

Net Income $2,478 $1,433 $2,635 $3,492 $2,372

Basic EPS $ 1.25 $ 0.73 $ 1.36 $ 1.90 $ 1.36

Source: Capital IQ, accessed May 28, 2014.

Note: Dell Inc.’s fiscal year ended on the Friday nearest to January 31.

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Southeastern Asset Management Challenges Buyout at Dell 114-015
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Exhibit 1b Dell Inc.’s Balance Sheet, 2009 to 2013 (in $ millions, except per share data)

Fiscal Year

2009 2010 2011 2012 2013

Source: Capital IQ, accessed May 28, 2014.

Assets

Cash And Equivalents $8,352 $10,635 $13,913 $13,852 $12,569

Short Term Investments 740 373 452 966 208

Total Cash & ST Investments 9,092 11,008 14,365 14,818 12,777

Accounts Receivable 4,731 5,837 6,493 6,476 6,6

Inventory 867 1,051 1,301 1,404 1,382

Prepaid Exp. 447 539 374 362 446

Finance Div. Loans and Leases, ST 1,712 2,706 3,643 3,327 3,213

Def erred Tax Assets, Curr. 499 444 558 682 850

Restricted Cash 213 147 – – –

Other Current Assets 2,590 2,513 2,287 2,379 2,671

Total Current Assets 20,151 24,245 29,021 29,448 27,968

Net Property, Plant & Equipment 2,277 2,181 1,953 2,124 2,1

Long-term Investments 454 782 704 3,412 2,577

Goodw ill 1,737 4,074 4,365 5,838 9,304

Other Intangibles 724 1,694 1,495 1,857 3,374

Finance Div. Loans and Leases, LT 500 332 799 1,372 1,349

Def erred Tax Assets, LT 568 237 75 – –

Other Long-Term Assets 89 107 187 482 842

Total Assets 26,500 33,652 38,599 44,533 47,540

Liabilities

Accounts Payable 8,309 11,373 11,293 11,656 11,579

Accrued Exp. 3,009 1,112 1,550 1,604 1,182

Short-term Borrow ings 113 499 1 1,503 1,809

Curr. Port. of LT Debt – – 578 924 1,101

Finance Div. Debt Current – 164 272 440 933

Curr. Income Taxes Payable 6 426 529 432 807

Unearned Revenue, Current 2,701 3,040 3,158 3,738 4,373

Other Current Liabilities 721 2,346 2,102 1,704 1,655

Total Current Liabilities 14,859 18,960 19,483 22,001 23,439

Long-Term Debt 1,898 3,417 4,318 5,467 4,887

Finance Div. Debt Non-Curr. – – 828 920 355

Unearned Revenue, Non-Current 3,000 3,029 3,518 3,855 3,971

Def . Tax Liability, Non-Curr. – – – 405 9

Other Non-Current Liabilities 2,472 2,605 2,686 2,968 3,269

Total Liabilities 22,229 28,011 30,833 35,616 36,839

Common Stock 11,189 11,472 11,797 12,187 12,554

Additional Paid In Capital

Retained Earnings 20,677 22,110 24,744 28,236 30,330

Treasury Stock (27,904) (27,904) (28,704) (31,445) (32,145)

Comprehensive Inc. and Other 309 (37) (71) (61) (59)

Total Common Equity 4,271 5,641 7,766 8,917 10,680

Minority Interest – – – – 21

Total Equity 4,271 5,641 7,766 8,917 10,701

Total Liabilities And Equity 26,500 33,652 38,599 44,533 47,540

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114-015 Southeastern Asset Management Challenges Buyout at Dell

Exhibit 1c Dell Inc.’s Cash Flow, 2009 to 2013 (in $ millions)

Fiscal Year

2009 2010 2011 2012 2013

Net Income $2,478 $1,433 $2,635 $3,492 $2,372

Depreciation & Amort. 666 647 621 545 531

Amort. of Goodwill and Intangibles 103 205 349 391 613

Depreciation & Amort., Total 769 852 970 936 1,144

Stock-Based Compensation 418 312 332 362 347

Provision & Write-off of Bad debts 310 429 382 234 258

Other Operating Activities 5 109 (23) 35 (391)

Change in Acc. Receivable 480 (660) (707) (53) (150)

Change In Inventories 309 (183) (248) (52) 48

Change in Acc. Payable (3,117) 2,833 (151) 327 (74)

Change in Unearned Rev. 663 135 307 701 382

Change in Other Net Operating Assets (421) (1,354) 472 (455) (653)

Cash from Ops. 1,894 3,906 3,969 5,527 3,283

Capital Expenditure (440) (367) (444) (675) (513)

Sale of Property, Plant, and Equipment 44 16 18 14 90

Cash Acquisitions (176) (3,613) (376) (2,562) (4,844)

Divestitures – – – – 45

Invest. in Marketable & Equity Securt. 749 155 (2) (3,221) 1,739

Net (Inc.) Dec. in Loans Originated/Sold – – (361) 278 167

Other Investing Activities – – – – –

Cash from Investing 177 (3,809) (1,165) (6,166) (3,316)

Short Term Debt Issued 100 76 – 635 –

Long-Term Debt Issued 1,519 2,058 3,069 4,050 3,311

Total Debt Issued 1,619 2,134 3,069 4,685. 3,311

Short Term Debt Repaid – – (176) – (331)

Long-Term Debt Repaid (237) (122) (1,630) (1,435) (3,248)

Total Debt Repaid (237) (122) (1,806) (1,435) (3,579)

Issuance of Common Stock 79 2 12 40 52

Repurchase of Common Stock (2,867) – (800) (2,717) (724)

Common Dividends Paid – – – – (278)

Total Dividends Paid – – – – (278)

Special Dividend Paid – – – – –

Other Financing Activities – (2) 2 4 8

Cash from Financing (1,406) 2,012 477 577 (1,210)

Foreign Exchange Rate Adj. (77) 174 (3) 1 (40)

Net Change in Cash 588 2,283 3,278 (61) (1,283)

Source: Capital IQ, accessed March 9, 2017.

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Southeastern Asset Management Challenges Buyout at Dell 114-015

Exhibit 2 Dell Inc.’s Business Segment Revenues, 2011 to 2103

Amounts in $ billions 2011 2012 2013

Enterprise solutions 9,904 10,279 10,993

Services 7,673 8,322 8,396

Software 10,261 10,222 9,257

Client 33,656 33,248 28,294

Source: Dell Form 10-K, for year ended February 1, 2013.

Notes: Enterprise solutions includes sales of servers, networking and storage. Services provides technology consulting,
outsourcing and support services. Software sells third-party software and peripherals. Client provides personal
computers, workstation, tablets and accessories for consumer and commercial markets.

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Exhibit 3 Business Segment Information for HP Inc. ($ millions), 2011 to 2013

2011 2012 2013

Revenues

Personal systems 39,654 35,725 32,071

Printing 26,176 24,487 23,854

Enterprise group 31,460 29,779 28,183

Enterprise services 26,268 25,609 23,520

Software 3,367 4,060 3,913

HP Financial services 3,596 3,819 3,629

Operating earnings before tax

Personal systems 2,327 1,689 949

Printing 3,927 3,585 3,890

Enterprise Group 6,265 5,194 4,301

Enterprise Services 1,972 1,045 679

Software 722 827 866

HP Financial services 348 388 399

Operating assets

Personal Systems 15,781 12,752 11,870

Printing 11,939 11,169 10,705

Enterprise Group 30,858 30,851 32,388

Enterprise Services 25,765 16,383 15,229

Software 21,028 12,264 11,868

HP Financial services 13,543 1,294 12,011

Source: HP Annual Report for the year ended October 31, 2012.

Notes: Personal systems provide personal computers, workstations, tablets and related accessories for the consumer and
commercial markets. Printing provides consumer and commercial printing hardware, supplies, media and services.
Enterprise group provides servers, storage networking, technology services. Enterprise services provides technology
consulting, outsourcing and support services for infrastructure, applications and business process domains. Software
provides IT management big data and security solutions for businesses. HP financial services provides financing for
customers to purchase IT from HP.

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Southeastern Asset Management Challenges Buyout at Dell 114-015

Exhibit 4 Dell’s Special Committee

Alex J. Mandl – Director since November 1997

(Presiding Director) /Board Committees: Audit (Chair), Governance and Nominating

Current non-executive chairman of Gemalto, a digital security company; executive chairman from
June 2006 to December 2007. Previously president, CEO and board member of Gemplus, a company
that merged with Axalto in 2006 to become Gemalto. Since April 2001, a principal of ASM
Investments, a firm which funded early stage technology companies. Former chairman and CEO of
Teligent Inc., a telecomm company. President and COO of AT&T from 1994 to 1996; executive vice
president and CFO from 1991 to 1993. Chairman and CEO of Sea-Land Services Inc. from 1988 to
1991. On board of Horizon Lines, an ocean shipping company.

Laura Conigliaro – Director since September 2011 / Board Committees: Finance

Retired partner of Goldman Sachs. While at Goldman Sachs, served on the Compensation Policy
Committee, as well as the Americas Diversity Committee. From 1979 to 1996, an analyst at Prudential
Securities specializing in the computer technology sector. Previously an intelligence analyst at the
National Security Agency. On boards of Arista Networks, a cloud networking company, and
Bottomless Closet, a nonprofit organization.

Janet F. Clark – Director since September 2011 / Board Committees: Audit

Executive vice president, treasurer, CFO of Marathon Oil Corp. and member of its executive
committee. Previously, senior vice president and CFO for Nuevo Energy. Before joining Nuevo,
executive vice president of corporate development and administration, and CFO at Santa Fe Snyder,
an energy company. Began career as an investment banker specializing in corporate finance. On
boards of four nonprofit organizations in the Houston, Texas area. Serves on the Rice University-
Jones Graduate School of Management Council of Overseers. Named to the Forbes “One Hundred
Most Powerful Women in the World,” to the Houston Woman Magazine’s “Houston’s 50 Most
Influential Women of 2010” and “Best CFO of the Year for 2011 for a Large Public Company,” by the
Houston Business Journal.

Kenneth M. Duberstein – Director since September 2011 / Board Committees: Governance and
Nominating

Chairman and CEO of The Duberstein Group, Inc., a strategic planning and consulting firm. In the
1980s, served as White House Chief of Staff, Deputy Chief of Staff and Assistant to the President for
Legislative Affairs for the Reagan Administration. Began career in public service as an U.S. Senate
aide and later as Deputy Under Secretary of Labor under the Ford Administration. Served as director
of Congressional and Intergovernmental Affairs at the U.S. General Services Administration. Prior to
joining the Reagan Administration was vice president and director of Business-Government Relations
of the Committee for Economic Development and vice president of the government relations firm
Timmons & Co., Inc. Serves as lead director of Boeing Co.; on the boards of ConocoPhillips and The
Travelers Companies, and nonprofits including the Council on Foreign Relations and the Brookings
Institution.

Source: Dell Inc. website, http://www.dell.com/learn/us/en/uscorp1/leadership-board-of-
directors?c=us&l=en&s=corp&cs=uscorp1, accessed August 23, 2013.

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Exhibit 5 BCG’s Analysis of Dell Inc.

According to BCG, Dell had “certain positional strengths which [. . .] were not reflected in the
company’s public market valuation, likely as a result of investor concerns about the durability or use
of the company’s cash flows and uncertainty about [Dell’s] EUC [end user computing] business. [. . .]
Furthermore [. . . Dell’s] expansion of its ESS business has been slower than expected and [. . . its]
revenue growth across the different ESS business segments had been mixed. [. . . Dell] was still in the
process of integrating its numerous recent acquisitions and that these acquisitions had yielded lower
returns to date relative to the returns expected by [Dell’s] management. [. . . Dell] would have to take
steps to drive growth in its ESS business, including increasing investment in research and
development and expanding [Dell’s] sales force.”

In its assessment of separating Dell’s EUC business from its ESS business, BCG concluded “that
the risks and costs [. . .] in terms of revenue and cost dis-synergies, execution risk, time to completion
and transaction costs, appeared to substantially outweigh the potential benefit [. . .] from having the
public markets attach a higher valuation multiple to a new company containing [Dell’s] ESS
business.”

BCG created a forecast for Dell (see Table 1 below), which it presented to the Special Committee
on January 15, 2013 and to the Board on January 18, 2013. The forecast consisted of a base case, as
well as forecasts reflecting the incremental effect of certain management initiatives and market
sensitivities on the base case—a forecast based on the current business mix and geographical
distribution of Dell’s portfolio, taking into account, among other factors, industry prospects and
Dell’s competitive position within the industry. BCG then considered the effect of potential phased
productivity cost reductions, assuming in one case that 25% of such reductions (representing
reductions that could be achieved through specific potential initiatives identified by either
management or BCG) would be attained and in another case that 75% of such reductions would be
attained. In addition, BCG considered the results of initiatives to increase market share for the Dell’s
end-user computing (EUC) business, particularly in emerging markets; and to increase the
effectiveness of Dell’s sales force.

Table 1 BCG Forecast (in billions)

Fiscal Year

2014 2015 2016 2017

All Cases Revenue $56.4 $55.5 $55.1 $54.3

Base Case Gross margin 12.9 12.6 12.5 12.3

Operating income (non-GAAP1) 3.4 3.3 3.2 3.0

Base 25% Case Gross margin 12.9 12.8 12.8 12.6

Operating income (non-GAAP1) 3.4 3.7 4.0 3.8

Base 75% Case Gross margin 13.0 13.1 13.4 13.1

Operating income (non-GAAP1) 3.6 4.5 5.7 5.5

1 Excludes amortization of intangibles, severance and facility actions, and acquisition-related costs.Based on BCG’s forecast, JP
Morgan derived the following implied valuation ranges.

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Table 2 Implied Per Common Share Valuations

Based on Enterprise Value to

Estimated EBITDA

Based on Ratio of Price Per Share to

Expected Earnings Per Share

Base Case $10.50 to $15.00 $7.25 to $14.50

Base 25% Case $12.00 to $17.25 $9.00 to $18.00

Base 75% Case $15.25 to $22.50 $13.00 to $26.00

Source: Dell 14A Proxy Statement filed May 31, 2013, pp. 30, 41, 42, 66, 101,
https://www.sec.gov/Archives/edgar/data/826083/000119312513242115/0001193125-13-242115-
index.htm, accessed May 28, 2014.

Exhibit 6 Michael Dell’s Rationale for Taking the Company Private (Abridged)

Dell’s Transformation is necessary to navigate a rapidly changing landscape

o Dell’s transformation from a PC-focused business to an ESS-focused business is critical to
its future success, especially as the PC market is changing faster than anticipated.

o PC market fundamentals are under significant pressure, with growing threats from the
emergence of cloud computing and mobile/tablet products.

o Dell faces increasingly aggressive competition from low-cost competitors.

o Dell’s ESS business is growing but faces ongoing integration and competitive risk; Dell’s
market share in software and services remains less than 1%.

o Completing Dell’s transformation as quickly as possible is essential. Significant near-term
investment is needed for the Company to succeed in its transformation.

Accomplishing Dell’s transformation is more challenging as a public company

o Despite […] investments […] the Company’s transformation is still in its initial stages.

 Significant incremental investment is required to extend end-to-end IT solutions
capabilities, expand sales coverage, compete in emerging markets, invest in the
PC and tablet business […] and enhance customer experience.

These steps in Dell’s transformation are needed to restore the Company to health in the long term.
In the short term, however, they are likely to lower gross margins, raise […] operating expenses […]
and capital expenditures, resulting in lower earnings.

Taking these actions as a public company could adversely affect Dell’s stock price.

 A continuing decline in […] share price would […] adversely affect customer perception
and make it more difficult to retain employees.

 Our Company lives on customer confidence and the commitment of our excellent
employees. A lagging public stock price would hurt both.

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114-015 Southeastern Asset Management Challenges Buyout at Dell
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 As a public company we must take a more cautious approach to our transformation
because we must consider how our stock price will react to the steps we take […]. This
hurts the speed and efficacy of the transformation.

Risky transformation has a higher probability of success as a private company

o Given the market environment facing the Company, the significant investments and
aggressive steps the Company needs to take entail significant risk.

o The transition to “New Dell” is highly dependent on challenged “core Dell” performance.

o Dell’s rate of transformation is being outpaced by the rapid market shift to cloud.

o As a private company owned by two financially strong equity investors, Dell will be
better able to […] pursue its long-term business strategy and increase the speed and
likelihood of success […].

o Private owners aligned on Dell’s long-term strategy will be able to absorb the risks {…}
and likely near-term adverse effect on earnings.

o Financially strong equity owners have the resources to provide additional capital if
needed.

o As a private company, stock price fluctuations will no longer be a concern.

Source: “The Rationale for a Private Dell,” June 2013, Dell Inc. Schedule 14A, http:
//www.sec.gov/Archives/edgar/data/826083/000119312513266621/d558010ddfan14a.htm., accessed August 23,
2013.

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Southeastern Asset Management Challenges Buyout at Dell 114-015

Exhibit 7 Press Release Announcing Deal with Michael Dell and Silver Lake (Abridged),
February 5, 2013

Dell Enters Into Agreement to Be Acquired By Michael Dell and Silver Lake

 Dell stockholders to receive $13.65 per share in cash

 Transaction valued at approximately $24.4 billion

 Transaction implies a 37 percent premium over the average closing share price during
the previous 90 calendar days ending Jan. 11, 2013

Dell Inc. today announced it has signed a definitive merger agreement under which Michael Dell [. . .] in
partnership with global technology investment firm Silver Lake, will acquire Dell.

Under the terms of the agreement, Dell stockholders will receive $13.65 in cash for each share of Dell
common stock they hold, in a transaction valued at approximately $24.4 billion. The price represents a premium
of 25 percent over Dell’s closing share price of $10.88 on Jan. 11, 2013, the last trading day before rumors of a
possible going-private transaction were first published; a premium of approximately 35 percent over Dell’s
enterprise value as of Jan. 11, 2013; and a premium of approximately 37 percent over the average closing share
price during the previous 90 calendar days ending Jan. 11, 2013. The buyers will acquire for cash all of the
outstanding shares of Dell not held by Mr. Dell and certain other members of management.

The Dell Board of Directors acting on the recommendation of a special committee of independent directors
unanimously approved [the] merger agreement [. . .] subject to a number of conditions, including a vote of the
unaffiliated stockholders. Mr. Dell recused himself from all Board discussions and from the Board vote
regarding the transaction.

Mr. Dell said: “I believe this transaction will open an exciting new chapter for Dell, our customers and team
members. We can deliver immediate value to stockholders, while we continue the execution of our long-term
strategy and focus on delivering best-in-class solutions to our customers as a private enterprise. Dell has made
solid progress executing this strategy over the past four years, but we recognize that it will still take more time,
investment and patience, and I believe our efforts will be better supported by partnering with Silver Lake in our
shared vision. I am committed to this journey and I have put a substantial amount of my own capital at risk
together with Silver Lake, a world-class investor with an outstanding reputation [. . .].”

“Michael Dell is a true visionary and one of the preeminent leaders of the global technology industry,” said a
Silver Lake managing partner. “Silver Lake is looking forward to partnering with him, the talented management
team at Dell and the investor group to innovate, invest in long-term growth initiatives and accelerate the
company’s transformation strategy to become an integrated and diversified global IT solutions provider.”

Following completion of the transaction, Mr. Dell, who owns approximately 14 percent of Dell’s common
shares, will continue to lead the company as Chairman and Chief Executive Officer and will maintain a
significant equity investment in Dell by contributing his shares of Dell to the new company, as well as making a
substantial additional cash investment. Dell will continue to be headquartered in Round Rock, Texas.

Source: Dell Inc. Press Release, February 5, 2013, http://www.dell.com/learn/us/en/uscorp1/secure/2013-02-04-michael-
dell-silverlake-acquisition, accessed August 8, 2013.

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114-015 Southeastern Asset Management Challenges Buyout at Dell

Exhibit 8 Southeastern’s Case for Dell’s Future

It is Not About the PC Dell has been executing an M&A strategy to move away from PC business for

a number of years.

Dell’s Acquisitions Dell has spent approximately $13 billion (18 companies acquired) to do so.

These will benefit from the heavy R&D investments being made by Dell now.

Dell is delivering on its 15% IRR target for acquisitions.

Enterprise Solutions is the Future In Q1 Fiscal Year 2013, accounted for 65% of segment operating income. The

non-PC business has higher growth and higher margins.

Cost Cutting Opportunities Identified BCG estimated that Dell could realize up to $3.4 billion in cost savings

Positioning for Long-Term Profitability Dell’s aggressive PC pricing was designed to buy meaningful market share

while sacrificing near-term margins—a strategy that will benefit future owners

Long-Term Potential BCG’s cases (Exhibit 6) present an attractive picture of Dell’s long term

potential.

Reasonable Balance Sheet Utilization Under the Michael Dell/Silver Lake proposal, net Debt/EBITDA is about 3.7x.

Under the Icahn and Southeastern self-tender proposal, the maximum pro

forma Net Debt/EBITDA multiple is 1.7x.

Stock Price “Capped” by Merger

Consideration

Dell’s Special Committee may have obtained a 37% premium for stockholders

but the nearest comp had appreciated by 65% over the same period.

No Premium for Long-Term Stockholders Dell’s long-term stockholders have funded the company’s turnaround and

should be given the opportunity to benefit from their investment

Source: Southeastern’s “Investor Presentation: Opposing the Proposed Dell Take-Private Transaction,” June 27, 2013, at
http://www.sec.gov/Achives/edgar/data/807985/000094787113000441/ss180150_dfan14a, accessed April 7, 2014.

Exhibit 9 Southeastern’s Critique of Take-Private Levers

Note: “Denali” refers to Denali Holding Inc., set up by Michael Dell/Silver Lake as the vehicle to acquire Dell Inc.

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Southeastern Asset Management Challenges Buyout at Dell 114-015
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Exhibit 10 Icahn’s and Southeastern’s Leveraged Recapitalization Proposals

2013 Proposal Note

March 5 Dell gives shareholders a special $9.00

per share dividend

 Shareholders would maintain their existing

equity positions

 No change in the number of shares publicly

traded

 Sources of funding:

 $7.5 billion of cash

 $5.2 billion of new debt

 $2.2 billion from sale of receivables

May 9 Dell gives shareholders either $12.00

per share in cash or 7.27 additional

shares valued at $1.65 per share

(estimated the remaining stub would

earn between $0.50 and $0.89 in

annual near-term pre-tax EPS with

potential for greater long-term earnings)

 Shareholders would maintain their existing
equity positions

 4.4 billion of Dell shares would continue to trade

publiclya

 Sources of funding:

 Company cash

 $5.2 billion of new debt

 Icahn and Southeastern would take the

additional shares in lieu of cash

June 18 Dell tenders $14.00 per share for 1.1

billion shares

 Icahn and Southeastern would not tender their

shares; and other shareholders also could do

the same.

 Total shares publicly traded after transaction

approximately 0.7 billion

 Sources of funding:

 $7.5 billion of cash
 $5.2 billion of new debt

 $2.9 billion from sale of receivables

July 12 Dell tenders $14.00 per share for 1.1

billion shares plus one warrant for every

four shares purchased in the self-tender

 Warrant would allow holder to buy one share of

Dell stock for $20 for a period of seven years

 Icahn and Southeastern would not tender their
shares
 Total shares publicly traded after transaction
approximately 0.7 billion

Source: Casewriter from SEC filings and Peter Gothard, “Icahn Secures $5.2bn Funding, Seeks Dell Meeting,” Computing,
July 2, 2013, via Factiva, accessed August 21, 2013.

aAssumes 20% of the 1.8 billion fully diluted shares outstanding opt to take additional shares over the cash payout.

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114-015 Southeastern Asset Management Challenges Buyout at Dell
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Exhibit 11 Summary of Key Events

Date Event

July 2012 Michael Dell and Silver Lake began discussions to take Dell Inc. private in a leveraged

buyout.

Feb 5, 2013 Dell Inc. filed a Form 8-K with the SEC announcing it had signed a definitive merger

agreement under which Michael Dell and Silver Lake would acquire Dell for approximately

$24.4 billion, or $13.65 per share of common stock.

May 30, 2013 Dell Inc. filed a Schedule 14A with the SEC calling for a special stockholders’ meeting to be

held on July 18, 2013 to approve the sale of the company’s shares for $13.65 in cash per

share to Michael Dell and Silver Lake. Votes not cast would count as “no” votes.

June 2013 Icahn bought half of Southeastern’s holdings in Dell at $13.52 per share. The transaction

increased Icahn’s holdings to 9%, making him the second largest shareholder behind

Michael Dell.

July 18, 2013 Special stockholders meeting opened and immediately adjourned until July 24, 2013.

July 24, 2013 Dell and Silver Lake revised their offer, upping the per share cash price $0.10 to $13.75,

and giving a one-time $0.13 per share dividend, provided the voting rules were changed so

that abstentions would not be counted as “no” votes. The total offer approximated $24.9

billion. Stockholder meeting opened and immediately adjourned until August 2, 2013.

Aug 1, 2013 Icahn filed a complaint in Delaware against Dell Inc., in an attempt to stop the voting rule

changes, etc.

Aug 2, 2013 The board announced it had agreed to change the voting rules in exchange for the higher

offer, and set new vote date for September 12, 2013.

Aug 16, 2013 The court rejected Icahn’s complaint; opening the door for the September 12th vote.

Sept 9, 2013 In a letter to Dell Inc. shareholders, Icahn reported that his firm and Southeastern would no

longer invest in defeating the Michael Dell and Silver Lake bid to take Dell Inc. private.

Sept 12, 2013 Shareholders approved the sale of Dell Inc. to Michael Dell and Silver Lake for

approximately $24.9 billion.

Oct 29, 2013 Dell Inc. delisted from NASDAQ.

Source: Casewriter.

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Southeastern Asset Management Challenges Buyout at Dell 114-015

Endnotes

1 Southeastern Asset Management website, “About Us,” http://southeasternasset.com/about-us/overview, accessed April 8,
2014.

2 Abram Brown, “Two Celebrated Investors Want to Fix Their Funds–And Chesapeake Energy,” Forbes, January 2, 2013,
http://www.forbes.com/sites/abrambrown/2013/01/02/two-celebrated-investors-want-to-fix-their-funds-and-chesapeake-
energy/, accessed April 10, 2014.

3 Southeastern Asset Management website “Our Investment Offerings,” http://longleafpartners.com/investment-offerings,
accessed April 8, 2014.

4 Longleaf Partners Fund, http://www.longleafpartners.com/about_us/process, April 8, 2014.

5 Sam Forgione, “Chesapeake up against Low-key Activist Mason Hawkins,” Reuters, May 11, 2012,
http://www.reuters.com/article/2012/05/11/us-chesapeake-hawkins-idUSBRE84A14P20120511, accessed April 7, 2014.

6 Abram Brown, “Two Celebrated Investors Want To Fix Their Funds–And Chesapeake Energy.”

7 Michael Kanellos, “Dell Beats Compaq for No. 1 Ranking,” CNET News, April 19, 2001, http://news.cnet.com/2100-1001-
256143.html, accessed January 23, 2014.

8 “Where Dell Went Wrong,” Bloomberg BusinessWeek, February 18, 2007, http://www.businessweek.com/stories/2007-02-
18/where-dell-went-wrong, accessed January 23, 2014.

9 Tom Krazit and Michael Kanellos, “Michael Dell Back as CEO; Rollins Resigns,” CNET, January 31, 2007,
http://news.cnet.com/Michael-Dell-back-as-CEO-Rollins-resigns/2100-1014_3-6155185.html, accessed April 8, 2014.

10 Miles Weiss, “Southeastern Loses about $225 Million Selling Dell Shares,” June 19, 2013, Bloomberg,
http://www.bloomberg.com/news/2013-06-19/southeastern-loses-about-225-million-selling-dell-shares.html, accessed
January 17, 2014.

11 Dell Inc., Schedule 13A, May 30, 2013,
http://www.sec.gov/Archives/edgar/data/826083/000119312513242115/d505470ddefm14a.htm, accessed January 21, 2014.

12 “Dell Enters into Agreement to Be Acquired by Michael Dell and Silver Lake,” Business Wire, February 5, 2013,
http://www.businesswire.com/news/home/20130205006211/en/Dell-Enters-Agreement-Acquired-Michael-Dell-Silver,
accessed August 6, 2013.

13 Andrew Ross Sorkin, “Timeline: How Michael Dell’s Takeover Bid Got Hatche,” the New York Times DealBook, March 29,
2013, http://dealbooknytimes.com/2013/03/29how-michael-dells-takeover-bid-got-hatched/, accessed August 7, 2013.

14 Andrew Ross Sorkin, “Timeline: How Michael Dell’s Takeover Bid Got Hatched.”

15 Andrew Ross Sorkin, “Timeline: How Michael Dell’s Takeover Bid Got Hatched.”

16 Andrew Ross Sorkin, “Timeline: How Michael Dell’s Takeover Bid Got Hatched.”

17 Michael Dell’s Presentation to Investors, “The Rationale for a Private Dell,” June 2013, Dell Inc. Schedule 14A,
http://www.sec.gov/Archives/edgar/data/826083/000119312513266621/d558010ddfan14a.htm, accessed August 23, 2013.

18 “Dell Enters into Agreement to Be Acquired by Michael Dell and Silver Lake.”

19 “Dell Enters into Agreement to Be Acquired by Michael Dell and Silver Lake.”

20 Chad Fraser, “The Ins and Outs of the Dell Buyout,” Investing Daily, February 6, 2013,
http://www.investingdaily.com/16161/the-ins-and-outs-of-the-dell-buyout/, accessed January 23, 2014.

21 Michael J. De La Merced and Quentin Hardy, “Dell in $24 Billion Deal to Go Private,” the New York Times DealBook, February
5, 2013, http://dealbook.nytimes.com/2013/02/05/dell-sets-23-8-billion-deal-to-go-private/?_php=true&_type=blogs&_r=0,
accessed April 10, 2014.

22 Dell Inc. Schedule 14A, May 30, 2013,
http://www.sec.gov/Archives/edgar/data/826083/000119312513242115/d505470ddefm14a.htm, accessed April 7, 2014.

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114-015 Southeastern Asset Management Challenges Buyout at Dell

23 Southeastern’s “Investor Presentation: Opposing the Proposed Dell Take-Private Transaction,” June 27, 2013, at
http://www.sec.gov/Achives/edgar/data/807985/000094787113000441/ss180150_dfan14a, accessed April 7, 2014.

24 Southeastern Asset Mgmt., Schedule 13D, February 8, 2013,
http://www.sec.gov/Archives/edgar/data/807985/000094787113000078/ss164605_sc13d.htm, accessed April 8, 2014.

25 Southeastern Asset Mgmt., Schedule 13D, February 8, 2013,
http://www.sec.gov/Archives/edgar/data/807985/000094787113000078/ss164605_sc13d.htm, accessed September 16, 2013.

26 Charles Stein, “T. Rowe Price Says It Opposes Dell Buyout Over Offer Price,” Bloomberg, February 12, 2013,
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27 “UPDATE 4-Opposition Grows to Dell’s Landmark $24.4 bln Buyout,” Reuters, February 8, 2013,
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28 “AGREEMENT AND PLAN OF MERGER by and among DENALI HOLDING INC., DENALI INTERMEDIATE INC.,
DENALI ACQUIROR INC. and DELL INC.,” Dated as of February 5, 2013,
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29 David Benoit, “Dell Buyout: It’s Finally Here! Read the Details,” the Wall Street Journal, February 5, 2013,
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30 Dell Inc. Schedule 14A, “Dell Special Committee Statement Regarding Carl Icahn’s Demand that Dell Pursue Leveraged
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000119312513094825/d498430ddefa14a.htm, accessed August 14, 2013.

31 Andrew Ross Sorkin and Jeffrey Cane, “Blackstone Drops Out of the Bidding for Dell,” the New York Times DealBook, April
18, 2013, http://dealbook.nytimes.com/2013/04/18/blackstone-seen-abandoning-bid-for-dell/?_r=0, accessed August 8, 2013.

32Icahn and Southeastern Letter to Dell Inc.’s Board of Directors, May 9, 2013, http://www.sec.gov
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33Icahn and Southeastern Letter to Dell Inc.’s Board of Directors, May 9, 2013.

34 Andrew R. Sorkin and Michael J. De La Merced, “Icahn and Southeastern Ready a Rival Bid for Dell,” the New York Times
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35 Dell Inc. Press Release, “Dell Special Committee Requests Additional Information on Proposal,” May 13, 2013,
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14, 2013.

36 Dell Inc. Press Release, “Dell Reports Fiscal Year 2014 First Quarter Financial Results,” May 16, 2013,
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37 “Dell to Report Earnings 5 Days Early, on May 16,” Reuters, May 14, 2013, via Factiva, accessed August 8, 2013.

38 Shira Ovide, “Dell to Miss Profit Estimates, Beat on Revenue,” the Wall Street Journal, May 14, 2013,
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39 Michelle Sierra, “Icahn Reiterates Commitment for Dell Buy,” Reuters, June 19, 2013,
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40 Dell Inc. Schedule 14A, “Dell Special Committee Investor Presentation,” June 2013,
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41 Michael S. Dell, Schedule 14A, Presentation to Investors, “The Rationale for a Private Dell,” June 2013,
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42 Southeastern’s “Investor Presentation: Opposing the Proposed Dell Take-Private Transaction,” June 27, 2013, at
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2013.

For the exclusive use of H. XU, 2018.
This document is authorized for use only by HETING XU in Private Equity Basics taught by ARCHANA HINGORANI, HE OTHER from Apr 2018 to Oct 2018.

Southeastern Asset Management Challenges Buyout at Dell 114-015
29

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45 “Icahn and Southeastern Asset Management Announce Enhancement to Proposal,” PR Newswire, July 12, 2013, via Factiva,
accessed August 14, 2013.

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47 Michael J. De La Merced, “Voting Rule Change Is Seen as Crucial to Dell Founder’s Takeover Bid,” the New York Times
DealBook, July 28, 2013, http://dealbook.nytimes.com/2013/07/28/voting-rule-change-is-viewed-as-crucial-to-dell-founders-
takeover-bid/?_r=0, accessed August 9, 2013.

48 “Icahn Commences Litigation in Delaware Court against Dell Inc. And Dell’s Board of Directors,” PR Newswire, August 1,
2013, http://www.prnewswire.com/news-releases/icahn-commences-litigation-in-delaware-court-against-dell-inc-and-dells-
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49 Phil Milford, “Dell Founder Accuses Investor Icahn of ‘Grandstanding’,” Bloomberg, August 8, 2013,
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August 9, 2013.

50 Shira Ovide, “Dell’s Net Falls 72%, with Vote Looming on Buyout,” the Wall Street Journal, August 16, 2013, via Factiva,
accessed August 21, 2013.

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http://www.law360.com/articles/465473/, accessed December 5, 2013.

52 “Southeastern Asset Management Comments on Dell’s Proposed Go-Private Transaction,” PR Newswire, September 9, 2013,
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For the exclusive use of H. XU, 2018.
This document is authorized for use only by HETING XU in Private Equity Basics taught by ARCHANA HINGORANI, HE OTHER from Apr 2018 to Oct 2018.

TNT TECHNOLOGIES PRIVATE LIMITED

(TNT)

SAMPLE RECOMMENDATION NOTE

ALL INFORMATION IN THIS NOTE IS MADE UP –

FOR ILLUSTARTIVE PURPOSES ONLY

SINGAPORE

February 2018

38

TABLE OF CONTENTS

(1)

Transaction
S
ummary :

30

(2)

Investment Thesis :

30

(3)

Company Overview

34

(4)

Busine
s
s Plan :

47

(5)

Financial Projections :

48

(6)

Potential Risks :

49

(7)

Valuation & Return Expectations :

50

27

I Transaction Summary :
Sector : Technology (B2B) / Urban Development
Fund’s Transaction Size : up to US$ 15 mn
Instrument : Equity Shares / CCPS
Valuation : $40 mn (pre-money)

Fund’s Equity Stake : up to 29%
Exit Timing : 54 months
Expected IRR : 35 % p.a

II Investment Thesis :
(1) Growing Awareness & Demand GIS Solutions :

The Geographic Information System (GIS) market is evolving from a distinct software market into a decision support technology. The map based visualization and real-time information exchange is transforming planning, research and development, deployment and monitoring.
While a lot of spatial data has been collected, only recently workflow and information management systems are being developed that are able to link and process spatial and non-spatial data for decision support systems.
Government continues be the largest consumer of GIS, for a multitude of applications and e-governance initiatives. Private players in the field of telecom, infrastructure development and retail have also started taking advantage of this technology.
The demand for GIS solutions seems favourable :
(a) … Provide reasons for the demand here.
(b)

(2) TNT Positon of Strength on Cost & Technology Parameters :

One of the biggest selling points for GIS Software as a Service (SaaS) is the potential to reduce IT support costs by outsourcing hardware and software maintenance and support to the SaaS provider. Moving GIS to the cloud is likely to prove more cost effective, flexible, and productive for organizations wishing to rapidly deliver new capabilities. Further, use of open source platforms is desirable as they are more likely to receive software support from multiple vendors.
While the GIS players have mainly used closed-ended platforms of companies like ESRI and Intergraph, that entail upfront high license costs, extensive hardware requirements, require software to be built on the platforms for the end-use requirements. Even then these products have been rigid to use due to the difficulty and limitations in the extent of customization.
TNT on the other hand has leveraged their founders’ extensive domain knowledge to create a proprietary technology platform, which is hosted on a cloud and customized for Asian use in the fields of property tax, water & sanitation, monitoring of structures like dams & bridges and survey of heritage sites. Other modules are being prepared. As these solutions don’t require any licensing cost and minimal hardware requirements, TNT offerings are 35-80% cheaper than the competitor offerings and can be deployed even in smaller areas where there are budget limitations.

The following is a snapshot of the bid details for the property tax assignment, where TNT got the contract :

Table 1 : Summary of Bid Details

Item

Tender Quantity

Unit

Co. A

Co. B

Co. C

TNT

Technology

Autodesk

ESRI ArcGIS

ESRI ArcGIS

Proprietary

Survey of Buildings

40,000

$ / Unit

180

538

275

91

Open Plot

8,000

$ / Unit

85

438

180

80

Software: Computerization

1

$

500,000

145,000

800,000

500,000

AMC for Updates

48,000

$/ Unit

40

178

70

45

Web Application

1

$ / Unit

1,200,000

165,000

750,000

500,000

Total Bid Value

$

11,500,000

33,878,000

17,350,000

7,440,000

The interaction with the officers at the local municipality, indicates that the product is robust, easy to use, integrated with the workflow of the information management system and for the 31 areas where the work has been completed, there has been a detection of property tax violations that will increase property tax by 25%.

(3) Strong, Proven Capabilities :
(a) Property Tax : In a short period of time, TNT has successfully demonstrated its product with deployment of property tax modules across select wards of municipal councils. These wards have seen improvement in property tax collections by ~40%.
For instance, in Corporation of City of Area A it was found that 20% of the buildings were not in the records, 60% were not paying commercial taxes, 15% were not paying house taxes and 65% were not paying signage taxes. This helped increase property tax by over $ 7 mn in just one ward.
(b) Water & Sanitation : Institutions like Water Consultancy Services Limited (WCOS), and TEP University are using TNT’s solutions for conducting a thorough study of groundwater availability across seasons, survey and mapping of all major assets and pipelines of water supply & sewerage network and an interactive platform for viewing the project area with a decision support system for the civic officials.
Some of the assignments undertaken include :
(i) Ward C Municipal Corporation and Ward D Municipal Council in partnership with Advent
(ii) Water Department of Area F, and mapping for irrigation projects across City X and City Y with WCOS
(iii) Sewerage & sanitation surveys across Areas D and E with TEP University
(c) Monitoring of Civil Structures : TNT is working with Trent, a global monitoring solutions provider with local presence in 35 countries. Trent provides IoT sensors and TNT provides the software for computation, visualization and decision support. They are working together on a project in Africa, and evaluating other prospects like … (Give examples of pipeline).
(d) Heritage Buildings : TNT is working with AAIC to undertake the laser scanning and provide a web-based platform to visualize the data and implementation for the Capitol Complex.
As is evident from the above, leading domestic and international companies have chosen to work with TNT on various large and prestigious assignments covering diverse sectors. The Company has also built a strong pipeline of contracts aggregating $ 510 mn.

(4) Low Capital Intensity & Favorable Risk-Return Trade-off :

The Company offers software solutions on a SaaS platform that requires capital only to build the product while the direct variable costs are minimal. This results in low capital intensity and generates high return on capital with scale up. This is evident from the fact that the Company has been profitable since inception.
The Company requires capital to develop next level product capabilities. This investment will put the Company in a position to scale up to over $ 300 mn of annual revenues on a sustainable basis. At this level of revenues, the Company will generate EBITDA margins of over 36% and return on capital employed of over 100%.
The current round of funding coupled with internal accrual generation over the next few years will also strengthen the balance sheet to bid for larger contracts.
III
Company Overview
:
(1) Background : Founded in 2010, TNT provides services in the field of Geographic Information System (GIS) that include enterprise solutions, smart city solutions, municipal solutions, spatial data collection & application development and geospatial consultancy.
The Company is focusing on solutions in areas such as property tax, water supply & sanitation, environmental impact assessment, structural monitoring (dams, bridges, metro, heritage buildings etc), estate management, solar rooftop potential assessment, 3D mapping solutions, building plan approval and other location based data collection & monitoring services.
(2) Founders : The founders come with deep understanding of geospatial applications and the ongoing evolution of technology in a digitally connected world with influx of big data. The tie-ups with global players in the related fields and our primary interaction with various partners validates the same.
The profiles of the Founders are as follows : Here you could describe key management to build the idea that management is effective.

(a) Mr A….
(b) Mr B
(c)
(3) Shareholding Pattern :

Table 2 : Shareholding Pattern as on December 31, 2017

Name of the Shareholder

Equity Shares

Preference Shares

% Holding (fully diluted)

A

20052

–

41.23

B

20052

–

41.23

C

10

2,038

4.00

D

10

19,999

4.86

ESOP Pool*

4,446

–

8.68

Total

ESOP pool to be created
(4) Snapshot of the Sector :
The Geospatial Information System (GIS) has been globally available for a few decades, but is still a relatively new and burgeoning field. It is only recently with the advancement in technology and digital applications becoming mainstream that adoption of GIS based applications has started gaining traction. The industry is far from mature and the traditional information management systems are not built to leverage the value of spatial information inherent in their data .
There are varied form of spatial data collection technologies that include aerial photography and satellite imagery, specialized sensors and metering systems, human surveys or direct collection of customer information. Further, a great volume of data exists in map libraries and historical data sets and archives. This data needs to extracted and processed to transform it into a desired format that can be used in a GIS. The process is difficult and often prone to significant quantitative and qualitative errors.
Spatial information comes in a broad range of often-proprietary formats and is contained in a number of frequently incompatible data management systems. This is particularly the case in government organizations that have historically had specialized systems developed for dealing with information they are mandated to collect and maintain, which has created a plethora of data sets maintained in obsolete and incompatible specialized systems. This leads to significant needs for processing of data into a cohesive data set that coincides spatially and minimizes errors in conversions or systems integration.
The next level of engagement requires a great deal of communication, training and awareness generation on the benefits and applications of GIS in becoming an active decision support tool. This involves understanding the operations of the organization, their problem areas, customers profile and state of their information management system, and accordingly customization of the GIS system functionality and user interface.

An example of a GIS system can be allowing an urban local body to establish a set of criteria viz. property price, end-use, age of property, adequacy of public conveniences etc., that would then provide them a list of properties and their property tax in a given area including maps of locations, house photos, tax incidence and compliance, aiding their decision making.
Table 3 : Overview of the GIS Sector

Tools

Aerial imagery, Electronic total stations, GIS, GNSS, LiDAR/Laser Scanning, Radar, Satellite imagery, UAVs/Drone

Application Areas

Assets and resource management, data acquisition and visualization, information systems, monitoring, planning and analysis, surveying and mapping

Benefits

Better precision and accuracy, enhanced data safety, security and control, faster decision making, improved cost efficiency, improved productivity, increased transparency and planning

Key Industries

Agriculture, Disaster Management, Electricity, Forest, Environment and Climate Change, Infrastructure, Urban Development, Water Resources

(5) State of GIS in Asia :
The outreach of geospatial technology in many countries has been dismal with city administrations for tax management and their day-to-day operations. Some of the key reasons have been due to piecemeal solutions offered by established geospatial technology players – either surveys or applications. Comprehensive solutions starting from data collection to data management to technology platform were not marketed well. Further, the administrations do not have dedicated IT teams or consultants or staff having technical understanding. Hence in the absence of a comprehensive solution, the data or applications remain largely unused.

Some of the key issues include :
(1) There is no national GIS or national DEM yet available in many countries.
(2) There is acute shortage of large scale geospatial data.
(3) The small-scale geospatial data are not up to date.
(4) There are no or very few national standards available for geospatial activities.
(5) It is common that several large and small infrastructural projects get delayed and lead to cost-escalation due to poor input of geospatial data and solutions.
(6) Lack of geospatial data and solutions imposes limitation on running successful disaster management operations.
(6) Company’s Service Offerings :
TNT’a service offering include end-to-end GIS solutions covering different modes of data collection, data management and software that includes workflow management, GIS based queries and functions, visualization and a customer friendly user interface.
The Company has developed specialized technologies for spatial data collection (location based information) that includes use of mobile apps during survey, terrestrial/mobile/aerial LiDAR (light detection and ranging), unmanned aerial systems (drones / UAV), IoT (Internet of Things) sensors etc.
The geospatial data is processed in its proprietary technology platform built on open source with specialized object sets, compliant with the Open Geospatial Consortium (OGC) Standards. The technology platform enables processing of varied data formats in a spatially enabled manner.
The hyperlocal information system is equipped with workflow management, intelligent visualization and easy-to-use interface that makes it one of the most user friendly GIS systems available. It can be integrated into the Enterprise Resource Planning (ERP) modules, or used as a SaaS platform (Software as a Service), or used as a standalone product with dedicated servers.
The typical process workflow for a GIS solution is as follows :
Table 4 : Typical Process Workflow

Project Initiation

Requirement analysis / user profiling

Data Creation

Physical surveys, import from CAD layouts, GPS based data collection, UAV/LiDAR surveys, listing of Sensor, Sensor location mapping

Data Management

Database creation, linking with non-spatial data and sensor data streams

GIS System

Creation of online Smart GIS Management System, which is integrated with the ERP and enables business analytics and customizable workflow

(7) Positioning & Differentiation :
The GIS space in Asia has many small and large players who focus on varied sectors and specialties. Some of the large players are …… The other small and mid-size players active in the field are ……
The players predominantly use close-ended platforms of global players like ESRI and Intergraph, build GIS solutions upon it for domestic customer requirement. As they have to rely on such platforms, the solutions are rigid, expensive and deployed only by large administrations and large sized companies.
TNT has developed its own cloud based platform that eliminates or simplifies many of the difficulties and bottlenecks faced in the service offerings of the global platforms. While its proprietary design hosted on the cloud enables it price its solutions 35-80% lower than competition.
Some of the key differentiating factors are as follows :
(a) Technology Platform : ESRI technology and Intergraph suite have been the most popular GIS products in Asia so far. However both are global companies and their local resellers just sell the enterprise licenses without offering customized solution and an end-to-end offering. As a result, many digitization initiatives have failed to take-off post survey of properties.
Existing product suite of ESRI, Intergraph, etc. require a server room and hardware, dedicated database server, administrator (DBA), customization team and continuous administration engagement in development process. In each instance there is difficulty in customizing taxation rules. This results in high cost levels for implementing GIS solutions.
TNT’s proprietary technology built on open source platforms and hosted on the cloud is combined with mobile workflow for geospatial mapping and workflow for property tax data with automated linking of spatial and non-spatial data to buildings and premises. This enables TNT to provide floor-wise visualizations and offer pay-as-you-use or annual licensing models.

Table 5 : TNT vs ESRI/Intergraph technology platform

ESRI/Intergraph

TNT

Requires a server license to be purchased which goes up to $ 5 mn

No server license required

Expensive due to extensive hardware, server room, dedicated database server, administrator (DBA) and customization requirements

Cloud based platform that eliminates majority of these costs, as result the cost drops by 35-80% over the peers

No mobile integration for data capture
Globally, ESRI data collector has been surpassed by young companies like Terrago, which excel in mobile based data collection
TNT’s mobile data collector works on a technology which is more modern than the technology used by ESRI

Seamless mobile integration, which helps in easy transfer of spatial and
non-spatial elements to web server for automated processing
Mobile app talks well with external GPS receivers through Bluetooth for improving spatial accuracy of data collected. Compliant with standard DGPS hardware from companies like Trent, Satlab, EOS, etc

Workflow needs to be configured

Seamless, customized workflow – already developed for property tax, sanitation

(b) Survey Capabilities : Proper data collection capturing both spatial and non-spatial elements is critical in developing an accurate, reliable GIS system. TNT has developed in-house survey capabilities with democratized tools for low-end GIS data collection using android phones, lasers and door-to-door data collection, as well as modern capabilities consisting of UAVs, Terrestrial LiDAR for building scanning and mobile LiDAR for street mapping. This helps collect accurate information at lower costs. Amongst the competitors, only MapGlobal has in-house survey capabilities, but it uses vehicle mounted street-mapper cameras with a focus on creating navigational solutions. All other companies outsource survey work.
(c)

(d) Competitive Landscape :
(i) TNT is focused on providing integrated and affordable GIS solutions, which can be offered even for small ticket assignments.
(ii) Other companies have a greater focus on navigational database creation. They work on the ESRI platform and have no focus on city administrations.
(iii) MapGlobal is a data company offering Address PoIs and applications built on them. They use the ESRI platform and have no focus on city administrations.
(iv) Company R is an IT systems company with large scale managed GIS services. They work on Geomedia platform and have a focus on large city administrations and Smart City programs. Property Tax is not a part of their key offerings.
(v) Other MIS systems such as KDMC etc : They focus on basic MIS workflow and clerical work, working on basic SQL based query systems. They focus on smaller ticket state mandates.

(8) Market Size & Customer Segments :
The Company has identified City Administrations as one of the largest addressable segments that will also generate positive social footprint with assistance in tax compliance and urban development.
Government at all levels collect and manage information that has spatial components. Typically, this information is not maintained in a spatially enabled manner and is thereby not utilized efficiently or effectively in decision-making processes. All levels of government; local, state or district, can use GIS technology in virtually every department or agency. This is due to the fact that the topics of their attention are related to jurisdiction and government duties. These applications include natural resource management, land use planning, law enforcement in case of litigations, health services, insurance analysis, emergency planning and response.

The immediate areas where TNT has focused its attention in developing solutions, for both government and private entities, are as follows :
(a) Property Tax : Property Tax accounts for about 30-35% of a city administrations revenue. However, the collection efficiency in the 36 large cities stands is only 63%, in the range of $ ~45 bn as against revenue potential of $ 63-94 bn. Based on research findings, if the property tax collection efficiency is increased to 85%, there is a potential to increase property tax revenues to $ 12 bn.
Presently, the city administrations databases to generate property tax bills are predominantly outdated and do not capture all the properties. The attempts to carry out comprehensive survey for updating the records have fallen short, but the challenges can be addressed with use of technology. The processes for generation of demands and monitoring of property tax compliance is also not automated, leading to further shortfall in collection.
TNT offers a solution of surveying properties using mobile app and laser range finders, integrated with web enabled geo-visualization platform, MIS generation, run queries and analytics for decision making. The solution has a unique offering of floor-wise visualization with on-premise data and photographs.
TNT has undertaken property tax projects in cities such as …., and successfully rolled out the GIS platforms which have increased the property tax revenues in these municipalities by over 40%.
The Company has identified an addressable market of 2,061 city administrations in Asia These consists of 95 mn properties, having a revenue potential of $ 20 bn from the property tax module.
(b) Water Supply & Sanitation : Water resource management is affected by multiple factors like population and economic growth, pipeline leakages, pollution, non-revenue water, climate change etc. The water works departments find it difficult to manage in the absence of timely insights on these factors.
There is increasing focus on creating sustainable solutions for water supply, irrigation and sanitation. The exercise includes thorough study of groundwater availability and quality across seasons and factors affecting them, as well as modelling for future scenarios. The study and analytics necessitates use of technology including geospatial study and visualization.
TNT has developed a Water Supply and Sanitation solution that is a combination of a GIS database, an operating system and an asset management module. It includes survey and mapping of all major assets and pipelines of water supply & sewerage network and an interactive platform for viewing the project area with a decision support system for the civic officials.
The Company has implemented its solution at …….
There are over 6,600 blocks in Asia with each having ~15 wards (administrative unit that manages the water resources). The company estimates an average contract value of $ 0.6 mn per ward translating to a market opportunity of $ ~6 bn.

(c) Heritage Buildings : The Archaeological Society of Asia has been allotted a budget of $ 2 bn in 2017 for the conservation and preservation of cultural monuments in the country. In addition, UNESCO World Heritage supports the conservation of 50 cultural world heritage sites in Asia.
Heritage conservation is a niche field of architecture and engineering, requiring precise data on the existing status of the structure that includes cracks and imperfections. Laser scanning is a widely used technology in the developed countries to scan the structures in three dimensions using laser point cloud. It documents monuments in as-is where-is condition. Cracks and damages to the structures are captured exactly through 3D point clouds. This helps in preparing the conservation design and rehabilitation programs.
TNT leverages terrestrial laser scanning technology to scan heritage buildings and has a distinct advantage over the prevalent manual processes in Asia. The accurate reading help anticipate possible future damages to the structure. A pre-restoration and
post-restoration laser scanning exercise helps compare changes brought about by the restoration process. TNT then helps the customers visualize the laser point cloud data by providing an interface where they can view, measure and plan their activities. 3D point cloud capability is an important feature of this solution.
The company estimates an average contract value of $ 0.7 mn per monument translating to a market opportunity of $ 6 bn.

(d) Structural Monitoring of Dams, Bridges & Civil Works : Monitoring the measurement of motion over time plays a vital role in project safety and management. For infrastructure, construction projects and natural structures, it’s important to understand what is moving, and by how much to better understand its structural performance and to predict its durability and remaining lifetime. Monitoring provides the information needed to support safe, economical and efficient operation of projects and structures.
TNT partners with Trent, a global monitoring solutions provider, to provide a comprehensive structural health monitoring system for dams and bridges. In a monitoring project, the use of geodetic, seismic, geotechnical and other sensors provides periodic observations of objects to detect physical changes such as unusual stress and strain, cracks and other deteriorations which occur due to factors such as loading, corrosion, fatigue, temperature and time. At user-specified intervals, the sensors take measurements to determine any changes in position, length or tilt. When the expansion/contraction properties of a geotechnically instrumented body are known, the additional use of prisms/GNSS to also monitor the position-related changes greatly enhances the quality control of the monitoring system.

(e) Other Segments : The Company has been active in providing solutions to other segments as well, such as :
(i) Estate Management.
(ii) Solar Rooftop potential assessment .
(iii) GIS solutions : assignments executed for Insurance, Highway Projects and Micro-Finance.
(iv) Building Plan Approval (to be introduced in 2018).

(9) Alliances & Strategic Tie-ups :
To implement GIS application and decision support systems in the city administrations requires a degree of educating them with regards to what GIS is, how it can be utilized, and what benefit/role it can play. A major task lies in the area of demonstrating the utility and cost effectiveness of implementing well integrated GIS systems. Accordingly, a large part of the business development of the Company goes towards educating the city administrations on cost and benefits of GIS implementation.
While the Company is working with various city administrations, there still exists a wide spectrum of applications and use-cases both with government agencies and the private sector that the Company’s limited marketing team is not able to tap into. TNT has started working with multiple strategic partners for business development and joint bidding. Give some examples here.
IV Business Plan :
(1) Capability Enhancement : With an eye to the expanding acTEPance and implementation of GIS solutions in Asia, requirement of customization and to leverage the evolving applications of technology, the Company has identified the following areas for capability enhancement over the next few years :
(a) Build local language support and translation APIs.
(b) Improving architecture to enable handling of large size images (satellite / drone images), quicker loading and image processing.
(c) Drone imaging and mapping, 3D imaging.
(d) Sensor integration / Internet of Things (IoT) capabilities.
(e) SAP integration.
(f) Desktop Data Creation.
(g) Integration of various modules (property tax, water & sanitation, estate management).
(2) Expansion & Diversification : With the customized solutions for City adminstrations developed, the Company will focus on adding features to the solution to enable ongoing engagement, as well as look to leverage its GIS platform to build solutions for new segments both in the public and the private sector.
(a) Property Tax Module : enhance features like payment and collection module for mobile app – to enable updation of payments at the time of collection, automated changed detection module to identify new construction, more robust MIS, enhanced security features and support for ultra-high resolution imagery (drone-based imagery).
(b) PPP based Revenue Model for Property Tax : revenue earned to be a fixed percentage of increased revenues for ULB.
(c) Water Supply Systems : build a complete hydraulic model from source to destination (house connections), which will enable the ULB to monitor the system, ascertain water supply at critical junctures, limiting the leakages and plugging non-revenue water component. The application is intended to work with flow meters, quality sensors and devices to give real time data and visualization.
(d) Utilities Module : this will help analyse and manage assets, reduce non-revenue usage, enable door-to-door management, consumer indexing of utilities and provide analytics for improving operational efficiency.

(e) Building Plan Approval Module : SaaS solution for real estate developers to submit their building plans (designs and layouts) to the ULB or Estate Management Authority for approval. Once approved the ULB staff can monitor progress and integrate it with the Property-Tax module for property tax management.
(f) Estate Management Module : improved asset management practices – demarcating the lease areas, linking geographic features to lease information, assessment details and planning new lease areas.
V
Financial Projections :

The financial projections have been prepared based on the business plan and equity infusion taking place by December 2017.
Table 6 : Financial Projections

($ mn)

2014

2015

2016

2017P

2018

2019

2020

Revenue

6.7

11.2

11.6

52.8

124.0

682.9

1,224.9

Direct Expenses

0.6

0.8

1.4

18.3

44.3

185.4

318.6

Sales & Marketing

0.0

0.0

0.0

4.6

32.4

97.4

158.1

G&A Expenses

4.6

7.7

7.9

18.9

80.3

169.8

304.5

EBITDA

1.4

2.7

2.2

10.9

-32.9

230.2

443.6

EBITDA (%)

22%

24%

19%

21%

-27%

34%

36%

Depreciation

0.3

0.5

0.5

3.1

14.0

24.9

45.0

EBIT

1.1

2.2

1.8

7.8

-47.0

205.3

398.6

Finance Expenses

0.1

0.1

0.1

0.2

0.4

2.4

4.3

PBT

1.0

2.1

1.7

7.6

-47.4

202.9

394.4

PAT

0.7

1.4

1.1

5.3

-47.4

142.2

276.3

PAT (%)

10%

13%

10%

10%

-38%

21%

23%

Networth

5.8

7.2

12.8

118.1

70.7

212.9

489.1

Debt

2.4

0.6

0.4

0.4

0.4

0.4

0.4

GFA

2.7

2.9

3.1

12.4

60.2

121.2

233.8

Net Working Capital

1.6

4.3

7.7

7.5

19.4

126.9

232.1

CF from Operations

3.7

-0.9

-1.8

8.6

-44.8

59.8

216.1

CF from Investments

-0.8

-0.2

-0.2

-9.3

-47.7

-61.1

-112.6

CF from Financing

1.5

-1.9

4.2

100.0

0.0

0.0

0.0

Free Cash Flow

4.3

-3.0

2.2

99.3

-92.6

-1.2

103.5

Cash Balance

5.2

2.3

4.4

103.7

11.1

9.9

113.5

ROCE (%)

27%

52%

24%

66%

-125%

155%

137%

ROE (%)

16%

22%

11%

8%

-50%

100%

79%

Some of the salient features :
(1) The Company has sustained focused on profitability and operational cash generation since inception.
(2) Survey and other direct expenses form about 30-35% of revenue. Accordingly, as the revenues grow, working capital requirements are not expected increase in the same proportion.
(3) The Company needs to quickly strengthen its technology team to build solutions for the nascent but expanding business from City adminstrations and private enterprises, as well develop solutions for the Smart City Programs. The sales and marketing team needs to be built as well. This results in high operational expenditure and operational loss for a year.
(4) The Company already has built up an active pipeline to the tune of
$ 75 mn, which are at various stages of discussion. This provides good visibility for next two year revenue projections.
(5) Low capital intensity and highly scalable business, thereby providing high return on capital with expansion in subsequent years.

VI
Potential Risks :
(1) Lack of management bandwidth : The Company is presently over-reliant on the Founders for marketing, as well as product evolution.

Mitigant : Post funding, the Company plans to build a strong management team. The Company currently has a 20 member team and an ESOP framework in place. It has identified key institutions to recruit fresh talent, advisors, consultants and talent who can accelerate the growth.

(2) High dependence of government tenders: Presently, 60-80% of the revenues are from property tax module that is awarded by City adminstrations through competitive tenders. There is an inherent risk of delays in award of contracts or losing the contracts to peers.

Mitigant : To de-risk, the Company has initiated strategic marketing tie-ups that will reduce its reliance on property tax module, as well as government tenders. While some of these tie-ups have yielded results but the Company needs to continue its marketing efforts and diversify its client base and user industries in order to mitigate the cashflow risk.

(3) Competitive Intensity for Large Contracts : For large sized contracts such as Smart City Programs or from the City administrations of the large 36 cities, there is participation from all large cap companies with revenues of over $ 500 mn. The Company may likely face bottlenecks qualification criteria or skepticism as the Company is yet to execute any contract for a large city administration.

Mitigant : TNT has implemented their solution in diverse GIS applications for reputed partners, which provides validation to the Company technical ability and ability to execute large contracts. With this round of funding, the Company will also have the balance sheet to meet the financial criteria to bid for large contracts.

VII
Valuation & Return Expectations :

(1) SaaS Valuation Benchmarks :
TNT is a SaaS Company offering multidisciplinary geospatial solutions and specializes in using GIS and GPS information for solving problems of businesses across different sectors and civic bodies to make them smart in all respects. Multiple metrics from various sources have been evaluated to benchmark the entry valuation for investment in TNT.
Table 7 : Global SaaS Valuation Metrics

Details

Revenue Multiple

Source

Multiple on annual recurring revenue by Investors

6.8x

2013 study from Pacific Crest Advisors

Long term median valuation multiple on LTM revenue (revenue growth rate of 28% and median EBITDA margin of 5%)

5x

Capital IQ, Catalytic Investors, June 2016

Multiple in strategic acquisitions

8x

Redpoint, 2016

Valuation study by Software Equities Group

7.3x

Cultivation Capital, February 2015

High-growth public companies

6-12x

Crunchbase, January 2016

The median multiples of over 50 SaaS companies from CY2004 to CY2015

4-6x

Report- What We Know From A Decade Of SaaS, June 2015

The Saas Index for public market multiples is graphically shown below :

Chart 1 : EV/Revenue Multiples vs TTM Revenue Growth

Source : Software Equity Group, LLC

Chart 2 : EV/Revenue Multiples vs TTM EBITDA Margins

Source : Software Equity Group, LLC

The charts depicts that the highest growth SaaS companies received median of 7.4x EV/Revenue multiple and the most profitable SaaS companies posted a median of 6.1x EV/Revenue multiple, which was a 22% premium over the Index median of 5.0x .

(2) Listed Asian Companies with some exposure to GIS :
Listed companies are active players in the GIS space, but they are large IT companies with other segments forming a larger part of their revenues. While strictly not comparable, their multiples are provided as reference point :
Table 8 : Trailing 12 Month Valuation Multiples of Listed Companies

Details

TTM EV/Sales

TTM EV/EBITDA

Last 3 year revenue growth rate (%)

Company P

9.8

29.3

-31%

Company Q

4.2

17.1

2%

Company R

1.3

3.5

30%

(3) Past Fundraising by TNT : The Company has raised two rounds of funding in the past. Details of which are as follows :
Table 9 : TNT’s Past Fundraising

Investor

Date

Amount

Stake

EV/Sales (x)

Tech Partner

Jul 2013

$ 2 mn

5.01%

8.5

Incubator A

May 2015

$ 2.5 mn

4.0%

5.4

(4) Proposed Transaction : The Fund will invest up to $ 100 mn at a pre-money valuation of $ 245 mn for a 29% equity stake in the Company. Based on FY2017 expected revenues of $ 52 mn, the pre-money valuation comes to 4.7 times EV/Sales.
Fund B is also contemplating an investment of up to
$ 30 mn in the Company. In the event Fund B commits to invest $ 30 mn, the investment amount committed by the Fund will reduce proportionately.
(5) Exit Planning : The Company has successful deployed solutions across property tax, water & sanitation, estate management, heritage sites, insurance companies, Micro-finance industry and monitoring of large civil structures. With the current round of funding, the Company will have the balance sheet strength to bid for larger orders and take the growth path to the next level. This next phase of growth will also entail moving up the value chain with strong IOT capabilities and enhanced features of its multi-functional GIS platform.
Driven by adoption of modern technology, Govtech is emerging as a promising field across Asia and the world that can transform public governance to deliver the outcomes desired by its citizens. Accordingly, it became one of the major segments attracting venture capital with US$ 336 mn invested across 41 transactions in CY2016. The funding to this sector has registered a growth of 305% CAGR from CY2012 to CY2016
(a) Secondary / Strategic Sale : Over the next five years, we expect TNT to emerge as major player operating in the Govtech segment, with proprietary technology platforms and solutions that can be replicated across other disciplines in Asia and overseas. Apart from the venture/private equity investors, the Company will also be an attractive M&A target for large strategic players looking to acquire capabilities and presence in the segment
The increasing investor universe and the number of transactions the sector provides confidence that an exit can be consummated well within the Fund’s estimated holding period of 54 months
(b) Drag Along with escrow mechanism : In the event an exit is not achieved by the Fund by way of a secondary sale or a strategic sale within 54 months of investment, the shareholder documentation will also include Drag Along rights for the Fund. In such an event, the Promoters agree to offer such stake from their holding as required to effect a sale. Further, to safeguard the Funds right, the shares held by the Promoters shall be kept in escrow
(6) Return Estimation : Considering that there are challenges associated with government contracts, such as prolonged sales cycle and payment related issues, the revenue achievement may get delayed. Given below are return estimations which factors various levels of delay and underachievement of revenues and EBITDA for a 54 month holding period :

Table 10 : Return Estimation

Revenue (` mn)

750

600

500

EBITDA (` mn)

195

144

100

EV/EBITDA (x)

8

4.5x / 40%

3.3x / 30%

2.3x / 20%

10

5.6x / 47%

4.1x / 37%

2.9x / 27%

12

6.7x / 53%

4.9x / 42%

3.4x / 31%

(7) Other Key Investment Terms :

(a) One Board Seat and one Observer Seat.
(b) Valuation Protection.
(c) Tag Along Rights.
(d) Liquidation Preference.
(e) Veto rights over all major decisions, capital structure, business plan, expansion, diversification, appointment / change of auditors, appointment / removal of key management etc.

VIII
Recommendation:

TNT provides the Fund an attractive opportunity to invest in the high growth Govtech sector with a player having strong domain expertise and proprietary technology that have been validated by both domestic and global players.
The current state of City administrations indicate absence of bespoke, usable solutions, while the geospatial consortium NGCC have brought to attention an acute shortage of expertise and skillsets in the GIS space. With such a backdrop, TNT will emerge as a strong GIS player offering full stack solutions. The Company is now looking to raise funds to build capabilities for the large contract space and operate alongside industry leaders.
The Fund should consider an investment of up to $ 15 mn in TNT Technologies Private Limited (TNT). In the event the Fund decides to pursue this opportunity, the following next steps are envisaged:
(1) Accounting and legal due diligence.
(2) Shareholder documentation.

Annexure – 1

Summary of the feedback calls with customers, partners and others

Organization

Contact Person

Feedback

G

Mr….

· Working jointly on IOT Platform and mapping assignments
· Spoke highly about TNT and the Founders’ domain expertise and customized solutions
· Preferred Partner : Jointly working on DRIP, Metro, Heritage and Irrigation Projects

E

Mr….

· Has a Land ERP, takes TNT solutions for Data Collection and Mapping Platform for projects in Africa
· Spoke highly about the Founders’ domain expertise
· TNT’s solutions are agile and able to drill down deep to provide customized solutions
· TNT’s pricing 40-50% lower than ESRI, while the product was of very high quality

F

Mr….

· Proptery Tax module was implement in select wards
· User friendly and the ULB benefited
· Will give TNT more wards to implement GIS solutions post elections
· Will recommend the Company to others

G

Mr….

· Founders are prompt and forthcoming, experienced and service oriented
· Working with TNT for Water Projects in Indonesia

H

Mr….

· Delay in implementation because of change in scope
· Like the organisation and the founders
· Data for 31 wards has come and has detected non-compliance of 25%
· Very easy to use software, with site photos and floor wise data that makes extremely useful to issue property tax notices

I

Mr….

· GovTech expert has validated the TNT’s Product from technology standpoint. He used to run a GIS company prior to joining ON

J

Mr….

· Preferred vendor status
· ACR continues to engage with TNT for all its water projects.

Annexure – 2

Select List of Assignments Undertaken

S. No

Customer

Solution

Sector

Contract Value ($)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

Annexure – 3

Order Pipeline

Sr No

Customer

State / Geography

Scope

Work Brief

Estimated Contract Value

1

2,000,000

2

4,500,000

3

3,500,000

4

200,000

5

3,000,000

6

61,250,000

7

4,000,000

8

43,750,000

9

3,400,000

10

3,500,000

11

1,750,000

12

78,750,000

13

12,500,000

14

17,500,000

Annexure – 4

GIS Industry Overview: Business Segments and Opportunities

Sample – Details of the Industry can be inserted in a 4-5 pg report here.

4Q15
> 0% < =10% > 10% < =20% > 20% < =30% > 30% < =40% > 40% < =50% 1.8 2.1 5.9 6 7.6 4Q16 > 0% < =10% > 10% < =20% > 20% < =30% > 30% < =40% > 40% < =50% 2.2999999999999998 4 4.9000000000000004 6.7 8.6 TTM Revenue Growth Median EV / Revenue

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