Icahn, who holds an 8.7 percent stake in Dell, released an open letter today saying he was preparing to exercise appraisal rights that are available to shareholders of companies incorporated in Delaware. The uncertainty caused by the appraisal process may persuade Michael Dell and buyout partner Silver Lake Management LLC to put forth a higher bid if enough shareholders follow Icahn’s lead, he said.
Shareholders are set to vote on the Dell offer on July 18, after an earlier effort by Icahn to block the deal in Delaware court failed and the buyout received the backing of Institutional Shareholder Services Inc. this week. Icahn has proposed a stock buyback as an alternative to the founder’s plan, which is opposed by about a fifth of Dell’s shareholders.
“This is kind of a last ditch effort to try to do something” on the part of Icahn, said Steve Kaplan, a finance professor who teaches private equity at the University of Chicago’s Booth School of Business. “The banks didn’t give him a lot of money” for the buyback proposal “and ISS and the others said ‘Take the Dell offer’,” Kaplan said.
Dell stockholders who do not vote in favor of the deal next week would be eligible to exercise appraisal rights that are available under Section 262 of the General Corporation Law of Delaware. They would be entitled to receive a cash payment equaling the “judicially determined” fair value of their Dell shares, a process that could leave them with more or less than the $13.65 a share offered by Michael Dell and Silver Lake, according to a May 31 proxy statement filed by Dell.
In many merger deals, the suitors include terms that permit them to walk away from a buyout should a certain number of stockholders seek appraisal rights, Icahn said in today’s letter. Michael Dell and Silver Lake didn’t obtain this opt out right, Icahn said, exposing them to the possibility of paying a higher price should the Delaware Chancery Court determine that Dell stock is worth more than $13.65 a share.
“We believe the $13.65 merger price substantially undervalues your Dell shares, and we believe if you seek appraisal, you will receive more,” Icahn said in the letter.
Michael Dell and Silver Lake won’t sweeten their buyout offer because it already represents a significant premium for the company’s change of control, according to people with direct knowledge of their thinking.
Icahn’s attempt to scuttle Dell’s buyout comes after he canceled a meeting yesterday he was supposed to have with the company’s special committee of the board today, according to people familiar with the situation. The move is the latest twist in the six-month tug of war over Dell.
Spokesmen for Silver Lake and Dell declined to comment. A representative for Dell’s special committee of the board wasn’t immediately reachable for comment.
“He’s just saying the price is inadequate,” Elson said in a phone interview. Once shareholders petition for appraisal, “these cases can go on for years. Most of them settle, and in the end, a lot of times the court finds the merger consideration is correct.”
Appraisal results could go either way, Elson said. In one recent case, Delaware Chancery Court Judge Donald Parsons split the difference between what shareholders of Cogent Inc. sought for their stakes and what the company thought they were worth after a 2010 merger with 3M Co. In a 64-page opinion issued July 8, Parsons ruled that the fair value of Cogent as of Dec. 1, 2010, was $963.4 million, or $10.87 per share, more than the merger price of $10.50. Shareholders had argued that the company was worth as much as $16.26 per share.
In addition to ISS, proxy advisory firms Glass Lewis & Co. and Egan-Jones also recommended investors accept Michael Dell’s offer. To succeed, the buyout needs approval from a majority of investors excluding the founder, who has about a 16 percent stake.
“Rejection of this transaction would expose Dell and its shareholders to serious risks and uncertainties that will harm the company’s business and erode shareholder value,” ISS said in its July 8 report. “The alternative to accepting the buyout offer is to continue holding equity in a publicly traded Dell, with continued exposure to the risks and rewards of ownership,” ISS said.
Icahn is pressing Dell to buy back about 1.1 billion shares at $14 apiece, while leaving the remainder of the company public. For his plan to succeed, he must convince shareholders to reject Dell’s buyout and back his efforts to gain control of the board in a proxy contest that will count Michael Dell’s vote.
Last month, a Delaware Chancery Court declined a request by Icahn and other investors to block the deal proposed by Michael Dell, which they argued was the result of a flawed sales process.
“I do not see any plausible, conceivable basis in which to conclude that it is a colorable possibility that you could deem the choices made by this board to be unreasonable with all the different safeguards,” Judge Leo Strine said at a June 19 hearing.
If Michael Dell’s deal was mispriced, a higher buyout offer would have emerged, Strine said, and Icahn’s alternative proposal isn’t a full takeover.
Icahn’s letter raised the possibility that Michael Dell’s lenders might seek to back out of their financing agreements should a large number of stockholders seek appraisal rights. As a result, there would be “significant pressure” on Michael Dell and Silver Lake to seek a settlement during a 60-day period that dissenting shareholders have to reverse their decision, Icahn said in the letter.