Posted on 05/09/2005 10:45:13 AM PDT by HAL9000
RALEIGH - Billionaire Michael S. Dell, founder and chairman of Dell Inc., has placed a $99.5 million bet on Red Hat.
Dell invested his own money in the Raleigh Linux software developer, taking the largest single chunk of $600 million in debentures offered by the company in January 2004.
The investment was made by investment firm MSD Capital LP, which deploys an estimated $10 billion of Dell's personal wealth in public companies, private investments and real estate. The investment firm was given Dell's initials - MSD - as its name.
"It is certainly a good endorsement for Red Hat," says Katherine Egbert, an analyst with research firm Jefferies & Co. "Question (for Red Hat) is, did (Michael Dell) himself write a check, or is there a third party that wrote a check," says Egbert, referring to the possibility that investment managers - and not Dell - identified Red Hat for purchase.
Todd Fogarty, a spokesman for MSD Capital, declined to discuss the Red Hat investment but pointed out that 70 employees work for the New York investment firm. "It is our policy not to talk about investments," Fogarty says. A Red Hat spokeswoman did not return phone calls seeking comment.
Egbert notes that Dell Inc., which is based in Round Rock, Texas, resells Linux software on its servers and was an early investor in Red Hat.
The analyst does not see the purchase as a signal that Dell - neither the person nor the company - is interested in acquiring Red Hat. "Dell has never bought a software company," says Egbert. Neither Egbert nor her family own Red Hat shares, and Jefferies & Co. does not have an investment banking relationship with Red Hat.
Dell, a college dropout who is now 40, built a giant computer business by assembling computers and selling them directly to customers. His personal worth is estimated at about $16 billion by Forbes magazine.
Debentures act somewhat like bonds in that an issuer pledges a fixed return for a stated period of time. Alternately, the debentures can be converted into equity - or shares, in the case of a public company. Dell's Red Hat debentures currently are being converted into equity, according to a filing with regulators.
MSD Capital's purchase was the largest among more than 100 investment firms that together pumped $600 million into the Red Hat debentures. Other investors included Citadel Equity Fund, which invested about $82.6 million, and UBS Securities, which invested $51.81 million.
In a filing with regulators April 27, Red Hat said MSD Capital's $99.5 million worth of debentures would be converted into 3.89 million shares of the Raleigh-based company, led by CEO Matthew Szulik. At the stock's current price, those shares would be worth about $42.6 million.
The investment has lost value because Red Hat's shares have fallen by about 44 percent since the purchase was made in January 2004 and currently trade at about $10.95 per share.
Yet, MSD's total exposure to Red Hat stock might be less than the $99.50 million invested in its debentures.
That's because MSD could have bought Red Hat's debentures using a strategy called "convertible arbitrage," wherein an investment firm buys convertible debt in one bet while short selling the company's common stock at the same time.
"There are a lot of hedge funds that are doing convertible arbitrage," says Richard Rendleman, a professor of finance at the Kenan-Flagler Business School at the University of North Carolina at Chapel Hill.
Investors are "trying to find situations involving convertible bonds where the bonds are mispriced in some way compared to the underlying stock," says Rendleman.
For the trading strategy to work, an investor has to accurately predict the movement of a company's stock. Investors "only make money if your pricing models are correct," says Rendleman.
Buying such a large chunk of debentures in a technology company is unusual for MSD Capital.
On its Web site, MSD says: "While we maintain a generalist approach with regard to industries and transaction structures, we generally seek to invest in non-technology companies as a means to diversify our portfolio."
MSD Capital has invested in other public companies, including restaurant chains IHOP and Steak n Shake. As of Dec. 31, MSD owned about $350 million worth of shares of publicly traded companies, according to research Web site Lionshares.com.
Software companies fall fast and hard. Microsoft better be paying attention to this.
Ya Mon!
Bill G. is going to be plenty p*ssed off about this!
I like the Red Hat distro. It's fairly easy to install and works well. Too bad all the specialized software tools I use have to have Windows.
Maybe Dell will now actually support Linux on their machines. We've had tech support tell us that they can't help us with a hardware problem because we have Fedora installed, instead of Windows. If we call with the exact same problem on an identical machine with XP, they are willing to help out. Now we just lie and say the machine is running XP even if it's not.
as opposed to all the training they have right now to use windows?
All they need is well designed aps that fit the needs of the end user. If they have that, the OS is pretty transparent to the whole process of using a pc.
Dell finally going to offer LINUX on their PC's? If so, I'll be ordering a few promptly...
Bill doesn't give a sh*t about Dell? HAH. That's a good one!
how? I'm sure that all the parts together that make up a PC would be well over $100 (and Yes I know cost per item goes down as volume of items purchased increases). how'd they pull that off?
I wonder what this will do to the stock price? WIll GE be happy aboput this? These and other questions to be answered soon!
They may have to cut back on things like their 90-day warranty and free telephone support calls to India.
Microsoft has been calling for a $100 PC, and Dell could deliver it with Linux.
Of course, Microsoft could easily afford to start their own PC manufacturing division, and drive Dell out of business.
ping
Dell's a big supporter of Dubya, which may put a kink in any political strategy M$ might have planned vs. Linux -- not that M$ would have a political strategy.
Didn't Dell start in a dorm room too?
There's no evidence Mike Dell even knew this happened, very likely one of his accountants made the investment for him. With $10 billion plus, there's a lot of money to spread around.
Besides, whoever made the investment is surely regretting it now, since the stock has slid 40% in just the last few months. So Dell's $100 million is now magically $60 million, thanks to the boneheaded investment in Linux.
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