Dell Inc. (DELL:US)’s special committee is said to be seeking at least $14 a share from Michael Dell to cement the computer maker’s takeover, leaving them at an impasse after the founder said $13.75 was his best and final offer.
At $14, Dell’s special committee is open to a voting rule change proposed by Michael Dell and Silver Lake Management LLC that would give them enough shareholder support for a deal, according to a person familiar with the situation, who asked not to be identified because the matter is private. Dell’s shares were little changed in New York trading, closing at $12.92 -- a sign investors are concerned an agreement won’t be reached.
Michael Dell and Silver Lake bumped the offer for the personal-computer maker by 10 cents a share, valuing the deal at $24.6 billion, as the group seeks to end a six-month standoff with investors such as Carl Icahn. The sweetened offer is conditional upon the committee approving new voting terms that wouldn’t count abstentions as “no” votes. About 27 percent of shares -- not including Michael Dell’s holdings -- haven’t been voted, the buyers said today in a statement.
“There appears to be a lot of fence straddlers -- it’s a real nail-biter right now,” said Ashok Kumar, an analyst at Maxim Group LLC. The provision to not count abstaining votes as ballots against the deal “officially tilts this in favor of the management buyout team,” he said.
Dell’s special committee doesn’t plan to take action on Michael Dell’s proposal today, the person familiar with the situation said. After originally saying the latest offer would expire at 6 p.m. today, Michael Dell and Silver Lake extended the proposal until Aug. 2. If the buyers rescind their sweetened bid, the original $13.65-a-share price remains valid.
“The will of the majority of the unaffiliated shares voting on the transaction should not be thwarted by an unfair standard that counts unaffiliated shares not voting as ‘no’ votes,” Dell and Silver Lake said in a statement. “If this majority wishes to accept our offer, it is only fair to permit them to do so.”
In a separate open letter to shareholders, Michael Dell repeated his stand that taking the company private is the right thing to do and the current voting rule is “clearly unfair.”
“The decision is now yours,” the CEO wrote. “I am at peace either way and will honor your decision.”
The new offer from Michael Dell and Silver Lake is 26 percent more than the computer maker’s closing share price of $10.88 on Jan. 11, the last trading day before news of a deal surfaced. A majority of investors, excluding Dell’s 15.6 percent stake in the computer maker, will have to approve for the deal to pass. Dell had originally planned a shareholder vote on the buyout last week and rescheduled that to today after it was unable to secure enough support.
The vote was delayed for a second time today, until Aug. 2 at 9 a.m. local time at Dell’s headquarters in Round Rock, Texas. Investors who held shares as of June 3 were eligible to vote on the original proposal. Dell and Silver Lake said today that the record date should be changed to give shareholders time to consider the new offer.
Their bid is final because of the company’s deteriorating financial results, increased financing costs and a weak PC market, according to a person with knowledge of the matter. Silver Lake also won’t allow Michael Dell to take more of a discount on his own shares to further raise the offer, the person said. To reach the original $13.65 a share price for the buyout, Michael Dell agreed to roll his own stock into the deal at a discounted value of $13.36.
Icahn and partner Southeastern Asset Management Inc. have made a series of alternative proposals to derail the bid, most recently suggesting that the company repurchase most of the outstanding shares at $14 apiece and offer some warrants.
Icahn said today that changing the rules of the vote would remove an important shareholder protection. He reiterated that the offer undervalues the company and called for the CEO and the board to be replaced.
“We have spent the past six months explaining why we believe that not only does the Michael Dell/Silver Lake transaction undervalue the company, but it also freezes out loyal stockholders who deserve the opportunity to stay with Dell,” Icahn said in a letter. “Today, Michael Dell and Silver Lake crossed the Rubicon by trying to take away the one provision in the merger agreement that actually provided stockholders with a voice in their company. It is time for Michael Dell and this board to go.”
By sweetening the offer by such a small amount, the buyout team risks offending shareholders, said Jim Kelleher, an analyst at Argus Research.
“A dime won’t even get you a phone call,” said Kelleher, who recommends selling Dell shares. “There is a risk that the institutional investors, who were on the fence at $13.65, will not be neutral, but insulted by $13.75 and will swing to team Icahn.”
As of early July, investors opposed to the CEO’s $13.65-a-share transaction owned more than 20 percent of Dell shares, according to a report from shareholder adviser Glass Lewis & Co., which backed Dell’s original bid with Silver Lake. In addition to Yacktman Asset Management Co., opponents may also include Harris Associates LP and Pzena Investment Management Inc. (PZN:US), according to the report.
Separately, T. Rowe Price Group Inc., which holds 4.1 percent, reiterated its opposition to the Dell-Silver Lake offer last week, saying the previous buyout offer didn’t “reflect the value of Dell.”
BlackRock Inc., Vanguard Group Inc. and State Street Corp., three of Dell’s largest shareholders, indicated last week that they’re voting in favor of the Silver Lake-led deal, according to a person with knowledge of the matter. BlackRock had previously been leaning against the buyout, another person said. Those funds, like any Dell shareholder, can still change their votes before the final tally.
Representatives for BlackRock and Vanguard didn’t respond to requests for comment today. Officials for T. Rowe Price and State Street declined to comment.
By taking the company he founded in 1984 private, Dell is seeking to transform it into a bigger provider of hardware, software and services for corporate data centers, after years of ebbing sales and profit. Dell’s initial offer, which had the support of the company’s board, won backing from Institutional Shareholder Services Inc. earlier this month.
Since announcing the buyout Feb. 5, the special committee of Dell’s board has argued that the company’s prospects of a turnaround are better outside of the public lens.
Once the world’s top supplier of PCs, Dell has spent about $13 billion on acquisitions (DELL:US) over the past five years to add enterprise computing hardware, software and services, though the deals have yielded little return (DELL:US) for investors. Meanwhile, the company has ceded the fast-growing mobile-computing market to Apple Inc. and devices running Google Inc.’s Android operating system.
Dell’s board predicted another year of lackluster growth in fiscal 2014 as demand for PCs wanes, underscoring the urgency behind the company’s decision to be taken private.
Market conditions have only worsened. PC shipments, which account for more than half of Dell’s sales, dropped 10.9 percent in the second quarter, their fifth straight period of decline, research firm Gartner Inc. said this month.
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