Silver Lake's Backing Of Dealmaking CEOs Pays Off
Private equity firm Silver Lake has spent years cultivating and backing chief executives enamored with big deals, a strategy that pays off handsomely when large acquisitions such as the deal between chipmaker Broadcom Inc and cloud computing company VMware Inc come along.
Earlier on Thursday, Broadcom said it will acquire VMware for $61 billion, the second-biggest acquisition globally so far this year.
Silver Lake, whose assets under management are close to $90 billion, was deeply involved in the negotiations to combine the two companies, according to people familiar with the matter. It is in line for a payout because it owns a 10% stake in VMware. A Silver Lake spokesperson declined to comment.
Silver Lake's investment in VMware is the result of a business relationship with Dell Technologies Inc Chief Executive Michael Dell that started ten years ago. The relationship has been managed for Silver Lake by its co-chief executive Egon Durban.
The buyout firm's history with Broadcom Chief Executive Hock Tan goes back even further. Silver Lake was part of a private equity consortium that created Broadcom's predecessor, Avago, by acquiring Agilent Technologies Inc's semiconductor business for $2.66 billion in 2005. Silver Lake Chairman Ken Hao helped recruit Tan the following year to run the company.
Silver Lake helped these chief executives embark on corporate acquisition sprees. The strategy has diversified Silver Lake's investing that is focused on leveraged buyouts and growth investments and has helped differentiate it from its peers.
Mehdi Khodadad, co-head of law firm Sidley Austin LLP's private equity practice, said this playbook can help Silver Lake unlock more value from dealmaking.
"Private equity firms can help lend their related expertise in executing a synergy plan and disposing of non-core assets of the pro forma combined business," Khodadad said.
Silver Lake provided $1.4 billion in equity to help Michael Dell take his eponymous computer maker private in 2013.
Three years later, Silver Lake participated in a $4.25 billion equity financing for Dell's $67 billion acquisition of data storage company EMC Corp. Through that deal, Dell took over EMC's 81% stake in VMware. Dell also issued a new currency to help fund that deal - a "tracking stock" tied to the value of VMware shares.
Dell became a publicly listed company in 2018 by buying back the tracking stock in exchange for its own shares and up to $9 billion in cash.
Silver Lake got a 10% stake in VMware when Dell spun its controlling interest to its shareholders last year. Michael Dell received a 40% stake in VMware. Silver Lake continues to be Dell's second biggest shareholder with a 12.8% stake.
Silver Lake's journey with Hock Tan was similar. Silver Lake retained a stake in Avago when it listed in the stock market in 2009 and in 2015 it helped arrange the debt financing for Avago's $37 billion acquisition of Broadcom. Avago also took Broadcom's name.
In 2017, Broadcom launched a $117 billion takeover bid for rival chipmaker Qualcomm Inc, and Silver Lake was there to provide $5 billion in funding. That takeover was thwarted by the U.S. government over concerns that Broadcom, which was at the time headquartered in Singapore, would become dominant in the U.S. semiconductor industry.
STRONG FUND RETURNS
Silver Lake's profits on these investments are not known. Some of the firm's most recent funds, the $15 billion Silver Lake Partners V and the $10.3 billion Silver Lake Partners IV, had a net internal rate of return (IRR) of 37% and 36.7% as of September last year, respectively, according to data from the California Public Employees' Retirement System (CalPERS). Most private equity funds aspire to have a net IRR of 20%.
Silver Lake, whose investments include vacation rental firm Airbnb Inc, self-driving startup Waymo and online lender SoFi Technologies Inc, also has another major deal pending which it helped put together thanks to its relationship with a dealmaker CEO - Elon Musk's $44 billion acquisition of Twitter Inc.
Silver Lake offered to help finance Musk's contemplated $72 billion bid in 2018 to take electric car maker Tesla Inc private. Musk did not proceed with that offer, but four years later he turned to Durban, who sat on Twitter's board of directors, when he decided to acquire the social media company.
A Twitter regulatory filing showed how Durban acted as a liaison last month between Musk and Twitter's board. He became a Twitter director since 2020, when Silver Lake invested $1 billion in the company in the form of convertible debt financing.
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