Michael Dell faces mounting opposition to his plan to take Dell Inc. private as the company’s largest outside shareholder vowed to block the $24 billion buyout because it “grossly undervalues” the personal computer maker.
Southeastern Asset Management, the holder of an 8.5 percent stake in Dell that it began accumulating in 2005, sent a letter to Dell’s board expressing its “extreme disappointment” with the buyout offer of $13.65 a share announced on Feb. 5. Based on an analysis included in the letter, Southeastern said Dell is worth at least $24 a share.
Southeastern is the biggest institutional investor to voice its opposition to the buyout reached by founder Michael Dell and Silver Lake Management LLC, which faces growing dissent from shareholders. Richard Pzena, founder of Pzena Investment Management, said yesterday he will vote against the transaction. Donald Yacktman of Yacktman Asset Management said that the transaction may not go through at the current price and Harris Associates LP’s William C. Nygren said Feb.5 that he would “create a ruckus” if his firm were to find out that better alternatives exist to the one that Dell’s board agreed to.
“The price is completely out of proportion to what’s reasonable,” Pzena, founder and co-chief investment officer of the New York-based firm that bears his name, said yesterday in a telephone interview. “Southeastern laid out the case brilliantly; we think $24 a share is fair,” said Pzena, whose firm held 12.7 million Dell shares as of Dec. 31, according to data compiled by Bloomberg.
O. Mason Hawkins and Staley Cates, the top officers at the Memphis, Tennessee-based Southeastern, vowed to use all options at their disposal to block the buyout, including a potential proxy fight or litigation. The deal will be subject to a vote by “unaffiliated” shareholders, Dell said in a statement announcing the deal. The buyout calls for Michael Dell to contribute his stake in the company as well as additional cash, while Microsoft Corp. will provide a $2 billion loan to help finance the transaction. It ranks as the biggest leveraged buyout in technology since 2007.
The deal “appears to be an effort to acquire Dell at a substantial discount to intrinsic value at the expense of public shareholders,” Southeastern said in the letter, a copy of which was included in a filing with the U.S. Securities and Exchange Commission. “Southeastern intends to retain and avail itself of all options at its disposal to oppose the announced transaction,” including a proxy fight, litigation and any rights to an appraisal of Dell’s fair value under Delaware law, according to the letter.
At least one of Southeastern’s clients decided that the buyout price, or something close to it, was sufficient. The firm disclosed in the SEC filing that it sold 943,334 Dell shares “at the direction of a client” at $13.46 each on Feb. 6 and 7, after the deal had been announced.
“I would be surprised if it went through at the price Michael Dell is proposing,” Yacktman, whose firm bought almost 15 million shares in the fourth quarter, said yesterday in a telephone interview from his officer in Austin, Texas. “There will be other people feeling a lot like Southeastern does.”
Gordon Goldstein, a spokesman at Silver Lake, declined to comment on the letter. Jed Repko, a Southeastern spokesman, declined to comment beyond the letter.
“The transaction offers an attractive and immediate premium for stockholders and shifts the risks facing the business to the buyer group,” David Frink, a spokesman for Dell, said in an e-mailed statement. “The go-shop process provides stockholders an opportunity to determine if there are alternatives that are superior to the present offer.”
Southeastern, which manages the $8 billion Longleaf Partners Fund, has previously lauded Michael Dell, describing him in an August report to clients of the fund as “one of the most vested and engaged CEOs we have as a partner.” Dell is struggling to keep up with nimbler competitors in mobile and cloud computing, after years of trying to diversify from personal computers, which make up about half of sales.
Southeastern started buying Dell shares in the third quarter of 2005 and built its stake to 130.9 million shares by the middle of 2007, when the price ranged from $19.91 to $41.54 a share. Southeastern’s stake varied in size after that, reaching a high of 168 million shares at the end of the first quarter of 2009, when the stock traded at an average price of $9.59 a share.
Yesterday’s filing discloses that Southeastern paid about $2.06 billion, or $16.88 a share, for the 122.3 million shares it now holds. The money management firm had previously reported paying about $213 million for options on 25 million Dell shares. Based on the buyout price, Southeastern would realize a loss of almost $400 million on its shares should the buyout proceed.
“We’re not surprised,” Shaw Wu, an analyst at Sterne Agee & Leach Inc., said of Southeastern’s opposition in an e-mail. “We had said that it remains to be seen if the deal would pass given the modest premium to recent closing prices.” Wu has a “neutral” rating on Dell.
Southeastern said its larger concern is missing out on future gains should Dell shares reach its estimate of the company’s intrinsic value. The money-management firm said in yesterday’s letter that it would have endorsed a leveraged recapitalization that would require Dell to borrow $9 billion to help pay shareholders a special dividend of $12 a share, or a go-private type sale where shareholders could choose to participate in a new company with a “public stub.”
The current offer “deprives public shareholders of the ability to participate in the company’s substantial future value creation,” Southeastern said in the letter.
Michael Dell and other company directors were sued this week by an investor, Catherine Christner, who claimed the computer maker’s board is shortchanging shareholders in the management-led buyout. Dell abused his status as the company’s top executive and board chairman, lawyers for Christner said Feb. 6 in a lawsuit filed in Delaware Chancery Court.
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