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Dell-Icahn Showdown: Who Will Blink?


Shareholders will finally vote on the proposed (and hotly contested) deal to take Dell private tomorrow. The outcome will either put Dell's fate to rest or at least set the next stage of the battle.

How tomorrow's vote will play out is too close to call but there's a good chance the team lead by founder and CEO Michael Dell and Silver Lake Partners may not have enough votes to complete the $13.65 per-share deal. This deal is valued at $24 billion, thanks to corporate raider Carl Icahn's counter-offer, which he sweetened Friday.

If Icahn, backed by Southeastern Asset Management, can convince shareholders their offer is superior, and they ultimately accept it, that could have huge ramifications for the future of the storied company. Icahn has made no secret he intends to replace the entire board of the company including Michael Dell.

In a letter to shareholders last night, the company board's special committee, which has recommended the Dell-Silver Lake bid, said despite the appearance that Icahn is offering a higher per-share offer plus provisions to keep part of the company public, Icahn's bid would be riskier. That's because Icahn would presumably have to borrow against Dell's balance sheet, the company has long argued. The Dell letter's key argument:

We consider it unwise to layer substantial financial risk on a company already facing significant challenges from competition and from the rapid pace of technological change. It is, we believe, not an accident that no large publicly traded technology company carries high levels of debt. And while we recognize that, as a private company controlled by Mr. Dell and Silver Lake, the Company will have a significant debt burden, the risks of that capital structure will be borne entirely by the buyers and not by the public stockholders. Moreover, the buyers have the financial resources to invest additional funds if that proves necessary.

Conversely, a leveraged recapitalization of the sort advocated by Mr. Icahn would force Dell stockholders to maintain meaningful equity exposure to a non-investment grade, publicly traded company that we believe would likely be ill-prepared to weather further downturns in the PC business and could be hamstrung in its ability to make the additional investments needed to complete its transformational plan. We believe such a company would face instability that would undermine customer confidence and make it harder to attract and retain the best employees.

For its part, Southeastern Asset Management has argued shareholders are missing out on a superior opportunity for capital appreciation, pointing to the doubling of HP shares since November in a chart it posted showing analyst forecasts for the company at the time, as noted by Barron's Tiernan Ray. Icahn has also accused Dell of using scare tactics.

"They tell us about the profitable PC market drastically declining and point to their quarterly numbers," Icahn said in a letter posted Monday. "But they neglect to point out the reduction in margin is of their own doing because they have, of their own volition, lowered prices which obviously have drastically reduced margins.  But even Dell's own management believes this is temporary."

Meanwhile Forbes reported today the current offer by the Dell-led team is facing an uphill battle, with Blackrock Group the latest influential shareholder backing off from supporting the deal. Dell has held steadfast in saying it will not sweeten its offer. Whether or not you're a major Dell customer, the outcome could have ramifications on the entire industry.

Will Michael Dell and his team blink or with it remain firm with its current offer, which Icahn and Southeastern say undervalues the company? And how would you like to see this play out? Comment below or drop me a line at [email protected].

Posted by Jeffrey Schwartz on 07/17/2013 at 1:15 PM


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