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Southeastern Asset Management Opposes Current Transaction for Dell



      Southeastern Asset Management Opposes Current Transaction for Dell

Sends Letter to Board of Directors

PR Newswire

MEMPHIS, Tenn., Feb. 8, 2013

MEMPHIS, Tenn., Feb. 8, 2013 /PRNewswire/ -- Southeastern Asset Management,
Inc. the largest outside shareholder of Dell Inc. (NASDAQ: DELL), today
announced that it has sent a letter to the Board of Directors of Dell noting
that it believes Dell's proposed go-private transaction grossly undervalues
the Company, and will not vote in favor of the transaction as currently
structured.  Southeastern intends to retain and avail itself of all options at
its disposal to oppose the announced transaction, including, but not limited
to a proxy fight, litigation claims and any available Delaware statutory
appraisal rights.  Southeastern beneficially owns on behalf of its investment
advisor clients approximately 8.5% of Dell's outstanding shares (including
options).  Southeastern filed the letter with the SEC in an SC 13D today.

In its letter, Southeastern notes that it believes that the proposed
transaction, under which Dell's public shareholders would receive only $13.65
per share, clearly represents an opportunistically-timed bid to take the
company private at valuations far below Dell's inherent value, and deprives
public shareholders of the ability to participate in the future upside of the
Company.

  The full text of the letter is as follows:

February 8, 2013

Board of Directors
Dell Inc.
One Dell Way
Round Rock, TX 78682
Attention:  Lawrence P. Tu

  Senior Vice President, General Counsel and Secretary

Dear Board of Directors:

Southeastern Asset Management, Inc. beneficially owns on behalf of its
investment advisory clients approximately 8.5% of Dell's outstanding shares
(including options), making us your largest outside shareholder.  We are
writing to express our extreme disappointment regarding the proposed
go-private transaction, which we believe grossly undervalues the Company.  We
also write to inform you that we will not vote in favor of the proposed
transaction as currently structured.  We retain and intend to avail ourselves
of all options at our disposal to oppose the  proposed transaction, including
but not limited to a proxy fight, litigation claims and any available Delaware
statutory appraisal rights. 

We expect the Board of Directors to perform its responsibility to thoroughly
review all alternatives to the proposed transaction to deliver maximum value
to Dell's public shareholders.  We would have endorsed a transformative
transaction that would have provided full and fair value to Dell's public
shareholders, including a leveraged recapitalization or a go-private type sale
where current shareholders could elect to continue to participate in a new
company with a public stub.  Unfortunately, the proposed Silver Lake
transaction falls significantly short of that, and instead appears to be an
effort to acquire Dell at a substantial discount to intrinsic value at the
expense of public shareholders. 

The Board of Directors has a fiduciary duty to consider any transaction, and
particularly an insider transaction such as this, in light of what is in the
best interest of all of Dell's shareholders.  We believe that the proposed
transaction, under which Dell's public shareholders would receive only $13.65
per share, clearly represents an opportunistically timed bid to take the
Company private at a valuation far below Dell's intrinsic value, and deprives
public shareholders of the ability to participate in the Company's substantial
future value creation.  Specifically, the following  supports our valuation
analysis:

  Southeastern believes that straightforward, modest valuations of Dell result
  in per share valuations vastly in excess of the $13.65 offer price.  Net
  cash per share after deducting structured debt within Dell Financial
  Services (DFS) is $3.64.  Dell Financial Services has a book value of $1.72
  per share.  In addition, since Michael Dell resumed his role as CEO in 2007,
  the Company has spent $13.7 billion or $7.58 per share on acquisitions
  intended to transform the Company into a sustainable IT business and lessen
  its reliance on the PC business. During Dell's June 2012 analyst day, Dell
  Chief Financial Officer Brian Gladden said that in aggregate the
  acquisitions to that point had delivered a 15% internal rate of return. The
  Company has neither taken nor discussed the need to take any write downs of
  these acquisitions.  We therefore conservatively believe the acquisitions
  are worth a minimum of their cost.  Taken together, these items total $12.94
  per share before we even look at the other businesses.

  The current bid therefore places a value of less than $1.00 per share on the
  remainder of the Company.  By any objective measure, that is woefully
  inadequate.  Specifically, none of the following are accounted for above:

  o As one of the dominant players in X86 servers, including the DCS division
    serving  "hyperscale" customers, the server business alone is easily worth
    $8.0 billion, or $4.44 per share.  This value excludes the results of 
    SonicWall, Wyse and Quest which are included in the "Acquisitions" total
    above and which are carried in the "Servers and Networking" division.
  o The part of the "Services" segment not captured in the "Acquisitions" line
    above consists mainly of Dell's "support and deployment" activities.  This
    business has less correlation with the PC business and more closely
    follows the expansion of data center activity.   In the last quarter, a
    quarter in which PC revenue declined by 19%, this support and deployment
    business grew by 5%. Estimates of its revenues are approximately $4.8
    billion, at which we believe it would produce at least $1.0 billion of
    operating income.   This operating income should be assigned a higher
    multiple than that attributed to the PC business. Our estimate of its
    value is at least $7.0 billion, or $3.89 per share.
  o The PC business generates roughly $27.0 billion of revenue and we estimate
    approximately $1.3 billion of operating profit.  While we could accept the
    most bearish case in assuming the "death of the PC," this business is
    certainly worth more than zero.  Even the PC's harshest critics would
    accept that the PC will be around for more than a few years.  A multiple
    of operating income of 4 gives this business a value of approximately $5.0
    billion, or $2.78 per share.  We would note that Lenovo (primarily a PC
    company), with net income of around $700 million, has a market value of
    $11.0 billion. 
  o The Software and Peripherals segment not captured above should be worth at
    least $3.0 billion, or $1.67 per share, which works out to a multiple of
    less than 7 times operating income.
  o We subtract $1.00 per share to account for capitalized unallocated
    expenses.

Adding the value of these operating segments to the $12.94 outlined above and
subtracting out an estimated $1.00 per share of DFS value embedded within the
segments yields a total corporate value approaching $24.00 per share.  This
obviously exceeds the $13.65 offer and does not even take into account Dell's
strong product distribution capability, especially in the small to medium size
business space (SMB).  This SMB distribution strength is the result of the
Company's heritage and legacy of selling directly to the end customer. 
Competitors like HP, IBM, Oracle, and Cisco do not have comparable
distribution strength in SMB.  This competitive advantage should enable Dell
to continue to be able to sell its portfolio of enterprise solutions and
services to a growing SMB market.

Valuation Summary

(per share)
Net cash ^(1)                       $ 3.64
DFS ^(2)                              1.72
Acquisitions since 2008 ^(3)          7.58
Server Business ^(4)                  4.44
Support and Deployment ^(5)           3.89
PC Business ^(6)                      2.78
Software and Peripherals ^(7)         1.67
Unallocated Expenses ^(8)             -1.00
DFS value embedded in segments ^(9)   -1.00
Total                               $ 23.72
(see below for footnotes)

In short, the evidence is overwhelming that shareholders are being deprived of
their proportionate share of the Company's true value, which is much more than
$13.65 per share.

We believe the Board of Directors had several alternatives that would have
produced a far better outcome for public shareholders than the proposed
transaction.

One alternative the Board of Directors could have implemented instead of
approving the Silver Lake transaction is a leveraged recapitalization that
would have facilitated the payment of a special dividend to public
shareholders.  As opposed to forcing shareholders out at $13.65, this option
would have allowed all shareholders to receive a large cash payment while
retaining ownership of significant future cash flow streams. The revenue mix
of Dell's business has changed as a result of strategic acquisitions,
resulting in the fact that roughly half of the annual free cash flow generated
comes from higher growth enterprise businesses while the other half comes from
legacy businesses linked to the PC.

As highlighted in an example below, the Company could have paid shareholders a
substantial special dividend (close to $12.00 per share in the example below)
while still retaining the ability to generate anywhere from $1.14 to $1.34 per
share of free cash flow per year (same as the Company's measure of "non-GAAP"
earnings). Using the midpoint of the free cash flow range of $1.24 based on
the estimates below, the Company would produce over $2.2 billion in free cash
flow annually. This level of cash flow generation provides interest coverage
of 4:1 based on the numbers below.  There are other variations of this general
idea, such as a larger immediate dividend and smaller resulting free cash
flow.  The Company could have undertaken the following three steps to create
the ability to pay a special dividend:

  1)     Realize stated book value for DFS, while maintaining origination,
  servicing, and the strategic customer relationship. This would mean proceeds
  of roughly $3.1 billion (DFS receivables less associated structured
  financing debt).

  2)     Pay the federal corporate tax to bring home offshore cash. This would
  raise at least $9.25 billion of cash for payout while obviously eliminating
  any future interest income. If the Company were to explore ways to move the
  overseas cash back in a more tax efficient manner, then the special dividend
  could be increased by the amount of tax saved.

  3)     Undertake new borrowings of $9.0 billion, with an expected interest
  rate of 7%.

Implementing these three steps could produce a special dividend of almost
$12.00 per share:

(in millions of USD, except per share item)
DFS proceeds                                $ 3,100
Foreign cash realized after tax               9,250
New borrowings                                9,000
Available for special dividend                21,350
Shares, RSUs, and in-the-money options        1,800
Potential dividend per share                  $   11.86

However, even after this special dividend, an amount that represents 85% of
the buying group's offer, there would still be available to shareholders well
over $1.00 of free cash flow per share:

 

Pro Forma Free Cash Flow

(in millions of USD, except per
share item)
                                    Low Estimate         High Estimate
EBITDA ^(1)                         $        4,500       $        5,000
Estimated Cap Ex                             -600                 -600
Free EBITDA                                  3,900                4,400
Less: Foregone DFS income^(2)                -275                 -275
Pro Forma Free EBITDA                        3,625                4,125
Existing Interest Expense                    -265                 -265
Interest from new debt                       -630                 -630
Pro forma pretax free EBTDA                  2,730                3,230
Estimated tax                                -685                 -810
Free cash flow                               2,045                2,420
Shares                                       1,800                1,800
Pro forma FCF/share                 $        1.14        $        1.34
^1 Range of EBITDA estimates from Citi, Credit Suisse, Deutsche, UBS, Raymond
James, Bernstein, Goldman

^2 Estimate (undisclosed)

A second alternative the Board of Directors could have implemented instead of
approving the Silver Lake transaction is another form of recapitalization that
would be a Dutch auction or some other structure that would allow shareholders
to tender shares for cash based on a price or range of prices for a determined
amount of shares. In this form of recapitalization, instead of using the cash
specified in the example above for a dividend, the Company would use that
cash  systematically to repurchase shares from those holders desiring to sell.
The effect would be a dramatic reduction in the share count which would leave
the remaining holders with increased ownership of the free cash flow stream
cited above.

We understand that Michael Dell is not bound to the Silver Lake transaction
and can participate in facilitating a superior offer.  We are concerned that
given the participation of Michael Dell in this transaction, that a
traditional go shop process is not sufficient to ensure that the Company
receives superior offers.  Specifically, as stated above, our value for the
entire Company is approximately $24.00 per share, but we also believe that
selling multiple business units to strategic buyers could easily exceed $13.65
per share.

Additionally, the Board of Directors should aggressively seek a proposal that
differs from Silver Lake's thereby not forcing public shareholders to sell for
a price so far below a reasonable valuation. A different buyer could serve the
same purpose as Silver Lake, undertake similar leverage, but importantly and
more fairly, could allow a reasonable percentage of the "rolled-in" equity to
come from existing shareholders who choose to do so. While functioning much
like a typical private equity transaction, this would actually leave a public
"stub," which would allow public shareholders to remain investors in Dell's
future. Several previous transactions have successfully implemented this type
of structure and it merits study by the Board of Directors. 

There are materially superior alternatives to the proposed transaction, and we
hope that in addition to supporting one of the alternatives, Michael Dell
would participate. If given the option, other existing shareholders could
provide as much or more equity than Michael Dell currently proposes to do,
which would lead to superior levels of equity contribution and more financial
flexibility to serve Dell's customers and to grow.

We understand that given the restrictions the Board of Directors has imposed
upon itself in connection with approving the ill-advised transaction announced
on February 5, 2013, the Board of Directors would not be able to pursue the
first two recapitalization alternatives stated above at this time.  However,
we are confident our fellow shareholders are as disappointed as we are with
the proposed $13.65 per share price, and the Company could pursue such
alternatives when the non-conflicted shareholders ultimately vote against the
proposed transaction.  

In closing we reiterate our opposition to the proposed Silver Lake transaction
and have serious concerns about the Board of Director's approval, which
penalizes shareholders by forcing them to exit at a significant discount to
intrinsic value rather than adopting alternatives such as a recapitalization
that would have better rewarded shareholders. We expect the Board of Directors
to satisfy its fiduciary obligations to all shareholders and to consider
superior alternatives that treat public shareholders fairly.  

Sincerely,

O. Mason Hawkins, CFA 
Chairman & Chief Executive Officer

G. Staley Cates, CFA
President & Chief Investment Officer

Notes:

1)      Cash & cash equivalents, short-term investments , and long-term
investments of $14.2 billion; total debt, excluding $1.4 billion of DFS
structured debt, of $7.6 billion; as of 11/2/12
2)      DFS book value of $3.1 billion as of 11/2/12
3)      Cash spent on acquisitions, net of cash acquired, as of 11/2/12 since
fiscal year 2008
4)      Assumes $8 billion of revenue and $880 million of operating income
excluding acquired businesses reported within Servers & Networking
5)      Assumes $4.8 billion of revenue and $1 billion of operating income
from "Support & Deployment"
6)      Assumes $27 billion in revenue and $1.3 billion of operating income
from "Mobility" and "Desktop PCs"
7)      Assumes $9 billion in revenues and $450 million in operating profit
from "Software and Peripherals"
8)      Assumes $300 million of unallocated expenses
9)      Assumes $250-$300 million of DFS net interest income embedded within
the segments

(Photo: http://photos.prnewswire.com/prnh/20130208/NY57273-INFO )

ABOUT SOUTHEASTERN ASSET MANAGEMENT

Southeastern Asset Management, Inc., headquartered in Memphis, Tenn., is an
investment management firm with $34 billion in assets under management acting
as investment advisor to institutional investors and the four Longleaf
Partners Funds: Longleaf Partners Fund, Longleaf Partners Small-Cap Fund,
Longleaf Partners Global Fund and Longleaf Partners International Fund, as
well as two Irish domiciled UCITS Funds: Longleaf Partners Global UCITS Fund
and Longleaf Partners US UCITS Fund. Southeastern was established in 1975, and
the first of the Longleaf Partners Funds was launched in 1987.

SOURCE Southeastern Asset Management, Inc.

Contact: Lee Harper, Southeastern Asset Management, +1-901-818-5240
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