Dell Inc. (DELL:US) reported results that underscore the challenges facing the company amid a decline in personal-computer sales, whatever the outcome of a vote next month on Michael Dell’s $24.9 billion plan to go private.
Net income for the fiscal second quarter fell 72 percent to $204 million, or 12 cents a share, from $732 million, or 42 cents, a year earlier, the Round Rock, Texas-based company said in a statement yesterday. Analysts on average predicted profit of $275 million, according to data compiled by Bloomberg.
The plunge in earnings bolsters the case made by Chief Executive Officer Dell and Silver Lake Management LLC that shareholders should accept their proposal to restructure Dell as a private company. Sales were helped by rising demand for servers and networking gear, even as Dell and other PC makers were stung by a slump in PC shipments, which have fallen for five straight quarters.
“They did surpass very low expectations but the year-over-year comparisons aren’t promising,” said Jayson Noland, an analyst at Robert W. Baird & Co. who rates the shares neutral, the equivalent of a buy. “The PC market continues to trend below expectations. It will play into Michael Dell’s plea to take the company private.”
Dell shares rose less than 1 percent to $13.82 at the close in New York. That’s just above Dell and Silver Lake’s $13.75-a-share offer, indicating investors will probably back the buyout after a special committee of Dell’s board accepted a sweetened proposal this month.
Revenue for the quarter ended Aug. 2 was little changed at $14.5 billion, compared with analysts’ average projection for $14.2 billion.
Dell and Silver Lake are offering a dividend (DELL:US) of 13 cents a share on top of an already-increased $13.75-a-share bid for the computer maker to boost their odds of winning support. They also said shareholders would receive an 8-cent-a-share third-quarter dividend regardless of when the deal closes.
Investors holding the stock as of Aug. 13 will now be eligible to vote on the buyout at a meeting scheduled for Sept. 12, and abstentions will no longer be counted as votes against the deal, a key sticking point for Dell and Silver Lake before the amended offer.
Michael Dell increased the special dividend to help win support from the special committee, according to a regulatory filing today. The CEO called Alex Mandl, the company’s lead independent director, on July 31 to propose an amended bid with a special dividend of 8 cents a share. The special committee rejected that amount, prompting an increased offer of 13 cents.
Dell’s investor base has shifted to a makeup that could also boost Michael Dell’s bid. Hedge-fund managers almost tripled their holdings of Dell in the second quarter, to 18 percent as of June 30 from 6.5 percent as of March 31, while traditional mutual-fund firms cut their stakes, according to holder reports filed as of Aug. 14 with the U.S. Securities and Exchange Commission.
The deteriorating state of Dell’s main business may deflate the case of billionaire activist shareholder Carl Icahn, who is arguing in Delaware court that he should be allowed to appoint directors, in order to keep Dell public and profit from his stake.
Icahn is asking a judge to bar Dell, the third-largest PC maker, from setting a new shareholder record date; to stop Michael Dell and his affiliates from voting any shares acquired since Feb. 5, the day the deal was announced; to stop the company from changing voting requirements; and to find that the board breached its fiduciary duties.
Icahn held 156.5 million shares of Dell valued at more than $2 billion as of Aug. 1, putting his stake of the company at 8.9 percent, according to data compiled by Bloomberg. Michael Dell is the largest shareholder with 15.6 percent.
Southeastern Asset Management Inc., Icahn’s partner, said the results underscored Dell’s strong performance in selling hardware, software and services to enterprises and that the buyout proposal “drastically undervalues the business and its future prospects.”
Icahn and Southeastern will seek to elect a slate of 12 directors to Dell’s board if shareholders reject the CEO’s buyout, the investors said in a statement today.
Second-quarter PC shipments dropped 10.9 percent to 76 million, according to market researcher Gartner Inc. Dell gets more than half its sales from desktops, laptops and related products, which are being replaced for many consumer and business uses by tablet computers including Apple Inc. (AAPL:US)’s iPad.
“The certainty of Michael Dell and Silver Lake’s cash offer is more compelling than the risk and reward of holding equity and warrants with questionable value,” Brian Marshall, an analyst at ISI Group, wrote in a note. “This quarter’s results did little to change our view of Dell’s medium- or long-term prospects. The basic circumstances and choices remain unchanged.”
Dell’s end-user computing revenue, which includes PCs and “thin client” computers for back-office workers, declined 5 percent to $9.1 billion. Sales in the enterprise solutions (DELL:US) group, which includes servers, storage and networking products, rose 8 percent to $3.3 billion.
Dell was originally scheduled to report earnings on Aug. 20, and moved its report up because of heightened interest in the company, according to David Frink, a spokesman for the company. It issued no forecast for the third quarter, which ends in November.
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