http://www.businessweek.com/news/2013-07-17/dell-24-dot-4-billion-buyout-plan-becomes-nail-biter-on-eve-of-vote

Bloomberg News

Dell $24.4 Billion Buyout Plan Is a Nail-Biter as Vote Looms

July 18, 2013

Dell Inc. CEO Michael Dell

Michael Dell, chairman and chief executive officer of Dell Inc., predicts the stock will fall to about $7.90 a share, based on trailing earnings, if the leveraged buyout (LBO) is voted down, according to a person with direct knowledge of his thinking. Photographer: Tony Avelar/Bloomberg

When Michael Dell announced a plan in February to take Dell Inc. private, today was supposed to be anticlimactic -- the day when shareholders would easily bless the buyout of the computer maker he founded 29 years ago.

Instead, the run-up to the vote on Dell’s $24.4 billion proposal has turned into a nail-biting game of chicken that has left Dell’s side racing to lobby shareholders (DELL:US) who consider the bid too low. Rather than ending with a victory dance for Dell, today may yield a decision to postpone the vote deadline to give him and private-equity firm Silver Lake Management LLC more time to convince investors of the merits of the leveraged buyout -- or to simply increase the $13.65-per-share bid.

Boosting the offer to $14 a share might suffice, said Angelo Zino, an analyst at Standard & Poor’s Financial Services in New York.

“If you get the $14 offer from Michael Dell, it’s enough to quiet enough of the shareholders out there and it’s enough to get the deal done,” he said.

On the eve of the vote, Chief Executive Officer Dell and Silver Lake weren’t budging, considering $13.65 their best and final offer, according to people familiar with the duo.

That position leaves Dell’s shareholders in a quandary: If they reject the deal, the stock, now at $12.88, could drop on concerns about Dell’s weakness in personal computers and its inability to compete with bigger companies in the corporate technology market. In Germany today, Dell traded at the equivalent of $12.83 at 10:00 a.m. in Frankfurt.

‘Shares Tank’

“You would see the shares tank, post a turn-down of $13.65,” said Zino. Michael Dell predicts the stock will fall to about $7.90 a share, based on trailing earnings, if the LBO is voted down, according to a person with direct knowledge of his thinking.

A more likely scenario is that the special committee of Dell’s board that is considering the bid postpones the vote, possibly by adjourning the meeting right after it starts, a person with knowledge of the matter has said.

A delay would prolong Dell’s struggle for control against billionaire investor Carl Icahn, who has pushed for months for the founder to raise his bid and has offered his own proposal. Icahn’s rival offer of $14 would allow Dell shareholders to retain equity in a publicly traded portion of the company, plus a warrant that could be exchanged for additional stock should Dell climb higher than $20.

Open Letter

Icahn and Southeastern Asset Management Inc., which holds a 3.98 percent Dell stake, urged the board not to postpone the vote in an open letter to shareholders yesterday.

“If the special committee doesn’t like the $13.65 price, then as we see it, they should not have approved the Michael Dell/Silver Lake transaction in the first place,” they said in the letter.

Phone and Internet voting is scheduled to close a minute before midnight New York time, and live polling will close about 15 to 20 minutes after the meeting starts, said David Frink, a Dell spokesman.

For Michael Dell, a loss to Icahn would be particularly irksome, according to a person familiar with his thinking. He understood when he started working on the idea of taking Dell private that another, higher bidder could win out. That would have been an elegant way to exit the company that carries his name by creating value for all stakeholders, the person said.

The last thing Michael Dell expected, the person said, was the prospect of losing the company to Icahn, whom he considers a corporate raider.

Cash, Warrants

Icahn and Southeastern say their proposal values Dell at about $15.50 to $18 a share. The special committee of the board calculated that if Icahn’s proposal gets consummated, each shareholder would get $9.99 in cash and 0.18 warrants.

Michael Dell, meantime, says a plan like Icahn’s would add substantial debt (DELL:US), curb financial flexibility and “hurt the company’s ability to weather an economic or business downturn,” the CEO said in a June 21 regulatory filing.

Another person with direct knowledge of the situation said the special committee believes the buyout group has room to raise the offer, and hasn’t been formally told by the buyers that their bid is best and final. Adjourning the vote would give shareholders (DELL:US), who can recast their votes up until the last minute, more time to change their minds, according to the person.

“Instead of executing the vote and maybe not getting it passed, Dell may need to postpone the vote until they know it could get passed through,” said Jeff Fidacaro, an analyst at Monness Crespi Hardt & Co. in New York.

Under Pressure

The stock will probably remain under pressure until the final decision, while staff may be tempted to jump ship. The company announced the resignation of Kelly McGinnis, Dell’s global head of communications, in an internal memo earlier this week.

Victory for Silver Lake and Dell would mean investors cash out while the company goes private and Michael Dell embarks on a turnaround of the business he founded in a university dormitory in 1984.

CEO Dell wants to take the company out of public hands to gain more freedom to transform the PC maker into a leaner, nimbler provider of data-center gear and corporate software.

A stream of disappointing earnings (DELL:US), dismal financial projections, endorsements from influential shareholder-advisory firms, and a steady campaign by Dell’s board has persuaded many investors that there are no other palatable options, said Sachin Shah, a merger-arbitrage strategist at Albert Fried & Co.

“You can’t say, ‘I’m not voting for the deal,’ and then see the stock decline,” said Shah, whose New York firm has clients who collectively own millions of Dell shares (DELL:US).

Dell’s Prospects

Icahn, meantime, is offering shareholders a chance to participate in the company’s recovery, asking them to forgo the buyout’s quick money and put their faith in Dell’s prospects -- even though that may mean tolerating the risk of a further decline in the shares.

To win the day, the buyout needs approval from a majority of holders, excluding Michael Dell, who owns a 15.6 percent stake. Yet investors that hold at least 20 percent of the stock have voiced opposition to the deal, saying it undervalues the company’s prospects, and some have thrown their weight behind Icahn’s plan. Shareholders who abstain will be counted as voting against the deal.

‘Attractive Gain’

Some investors have already resigned themselves to the offer that was initially outlined in February.

“We would like to see this go through in order to avoid the likely sudden drop in share price (DELL:US) and realize an attractive gain,” Kyle Timmermann, a portfolio manager at Parkway Advisors LP in Abilene, Texas, said in an e-mail. Parkway, which owns almost 12,000 Dell shares and $600,000 of the company’s bonds, advises insurance companies on investments.

Other shareholders have remained steadfast in their view that Dell and Silver Lake undervalued the company. Case in point: Yacktman Asset Management Co., based in Austin, Texas. According to its latest filing, Yacktman owns 14.9 million Dell shares. While Yacktman would profit by taking the Dell-Silver Lake buyout, the firm is voting against the deal and supporting Icahn and Southeastern’s alternative proposal.

“It’s hard to find things to invest in, and we’d rather own this than cash,” said Stephen Yacktman, co-chief investment officer.

Buybacks, Acquisitions

Dell has destroyed value by buying back shares at too high a price and overpaying for acquisitions (DELL:US), including computer-services company Perot Systems Corp., data-storage company Compellent Technologies Inc. and software maker SecureWorks Inc., Yacktman said.

BlackRock Inc., which has a 4.4 percent stake in the third-largest PC maker, voted against the buyout, according to a person with knowledge of the matter.

Once the world’s top PC maker, Dell has become a patchwork of desktops and laptops, tablets, enterprise software and data-center gear thanks to a slew of acquisitions since 2007. Sales (DELL:US) and profit are declining, and the company is projected to generate less net income (DELL:US) this fiscal year -- $1.44 billion -- than it did in 1999 on a third of the sales.

Dell shares, once an engine of wealth creation for investors and trading (DELL:US) higher than $25 before the 2008 financial crisis, were at less than $9 last November. PC shipments, which account for more than half of Dell’s sales, dropped 10.9 percent industrywide in the second quarter, their fifth straight period of decline, market researcher Gartner Inc. said last week. Many Dell investors want to take the sure money and avoid another swoon.

“Given the uncertain outlook, a buyout would be in the company’s best interest,” said Bill Kreher, an analyst at Edward Jones & Co. who has a hold (DELL:US) rating on the shares.

Investor Meetings

The company’s committee has met with major shareholders to seek backing for the buyout, and Michael Dell has attended some meetings with key investors, said a person familiar with the matter. Dell’s proxy advisers have also been calling small investors through their brokers and at home to ensure a favorable turnout, another person said.

CEO Dell and Silver Lake’s bid picked up some momentum earlier this month when Institutional Shareholder Services Inc., an influential shareholder-advisory firm, recommended investors support the deal. Securing ISS’s endorsement was a key win for the buyout team. Glass Lewis & Co. also backed the bid. Retail shareholders tend to follow the recommendation of the board, which in this case supports the deal.

“From a public-company shareholder’s perspective, if your CEO is willing to buy your falling knife for the privilege of catching it, there is probably a price at which you should let him,” ISS said.

To contact the reporters on this story: Aaron Ricadela in San Francisco at aricadela@bloomberg.net; Serena Saitto in New York at ssaitto@bloomberg.net

To contact the editor responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net


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