Dell and Silver Lake are ruling out an increase because the $13.65-a-share offer they made in February represents a fair and significant premium to where the stock would trade if the deal fell apart, said one of the people, who asked not to be identified because the process is private. The shares dropped 2.1 percent to $13.03 at yesterday’s close in New York.
The decision is the latest in the fight over Dell, set to culminate in a shareholder vote on July 18. While Institutional Shareholder Services Inc. is leaning toward a negative recommendation on Chief Executive Officer Dell’s proposal, people familiar with the situation have said, billionaire Carl Icahn said this week that he secured $5.2 billion in debt financing to support his third and last attempt to scuttle the LBO.
“Our recommendation is for Dell shareholders to take the $13.65-per-share deal and run,” said Brian Marshall, an analyst at ISI Group in San Francisco who has a neutral rating on the shares. “This company is in dire straits. They’ve got a lot of hurdles they need to surmount, and ultimately, if they vote down this proposal, the total outcome for investors is going to be less than the $13.65.”
Dell and Silver Lake decided not to increase their offer after being encouraged to do so by the special committee of Dell’s board, according to the people familiar with the situation. Silver Lake is willing to walk away from the deal if the bid isn’t successful, and the CEO isn’t prepared to finance personally another price increase as the company’s core PC market continues to deteriorate, said one of the people.
Representatives for Dell and Silver Lake declined to comment.
The special committee already negotiated six price increases before agreeing to the buyout announced on Feb. 5, a March 29 proxy filing shows. Michael Dell personally financed the last and final price increase with $500 million in cash and by committing to roll over 273.3 million shares at $13.36 apiece.
Icahn, Dell’s second-largest shareholder with an 8.7 percent stake, is proposing that the company make a tender offer for about 1.1 billion shares at $14 apiece. The activist investor said the buyback would address two shortcomings of the LBO offer: that it’s too cheap and that it doesn’t give shareholders the opportunity to profit from any improvement in Dell’s performance.
Michael Dell, who founded the PC maker 29 years ago, believes he can keep control of the company in the long run even if he fails to take the company private, said a person familiar with his thinking. Dell calculated he would keep control of the company even if Icahn succeeded, because the CEO’s stake would grow to about 41 percent without contributing shares to Icahn’s proposal. Icahn would have about a 22 percent stake, the person said. Dell’s bigger stake, which would probably make him the largest shareholder, could let him start a proxy fight to regain control of the company, the same person said.
“Michael can refuse to budge because even if shareholders vote down his offer, he and any special committee can and will make it tough for Icahn to get an alternative proposal approved,” said Erik Gordon, a business professor at the University of Michigan. “The downside to Michael of a defeat is small -- his status at Dell would remain just as is it was before he made his bid.”
While the success of the founder’s buyout proposal requires approval by a majority of shareholders, excluding Michael Dell, who has a 15.6 percent stake, Icahn’s plans could succeed only after shareholders vote against the buyout and eventually give him control of the board in a so-called proxy fight in which Michael Dell can and will vote.
Icahn’s proposal would add substantial debt, decrease financial flexibility and “hurt the company’s ability to weather an economic or business downturn,” Michael Dell said in a June 21 regulatory filing. “It would also jeopardize customer perception and employee retention.” He wants to take the company private to implement a turnaround to adapt it to new trends such as cloud computing, which in the short term would worsen the company’s earnings and margins.
Dell’s special committee, which last month urged shareholders to vote for Michael Dell’s buyout, said yesterday in a regulatory filing that Icahn’s tender offer gives the personal-computer maker a valuation more than twice that of its closest peer, Hewlett-Packard Co. (HPQ), and isn’t based on a concrete cost-savings plan. There’s a “substantial downside risk” to shareholders if they reject Michael Dell’s transaction, according to the filing.
In response, Icahn wrote in a letter to Dell shareholders that the special committee is using “scare tactics” to convince stockholders to accept the buyout offer. He repeated that he has the financing for his alternative proposal.
“We believe in the future of Dell,” he said. The special committee’s latest argument is “a Hail Mary attempt” to influence ISS and is “an unpersuasive and desperate regurgitation of tired arguments,” he said.
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.
The New York Post reported July 4 that Michael Dell wasn’t expected to raise his offer for the company.
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