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Michael Dell Sweetens LBO With Dividend to Sway Investors

Dell Inc. investors from Franklin Mutual Advisers to BlackRock Inc. signaled support for a sweetened buyout offer for the computer maker, suggesting founder Michael Dell is gaining the upper hand in a six-month fight to take the company private.

Franklin Mutual, which had previously opposed the buyout, changed its position after Michael Dell today agreed to boost his offer to buy Dell to as much as $24.9 billion with a special dividend. BlackRock, the world’s largest money manager and holder of a 4.4 percent Dell stake as of Aug. 1, also plans to back the offer, said a person familiar with the matter.

“Given the range of possibilities, this offer is acceptable to most shareholders, and I would put us in that category,” Peter Langerman, head of Franklin Mutual, said in an interview. “The market is telling you it is likely to be accepted.” Langerman runs the $20 billion Mutual Global Discovery Fund, which owned 12.3 million Dell shares as of June.

Dell jumped the most in six months following the offer, which came with concessions from the board committee that boost Michael Dell’s odds of winning shareholder support. The founder will finance the extra dividend after the vote had been delayed twice because he couldn’t muster enough support for the deal. Billionaire activist Carl Icahn, who opposes the deal and yesterday sued Dell to prevent changes to the voting procedures, said the “war” over the computer maker would continue.

‘Fair Result’

Dell and partner Silver Lake Management LLC are offering a dividend of 13 cents a share on top of an already-increased $13.75-a-share bid for the computer maker, according to a statement today from the board committee. In exchange, the investors holding the stock as of Aug. 13 will be eligible to vote on the deal, allowing arbitragers who bought the stock late on expectations the deal will go through to weigh in. Abstentions will no longer be counted as no ballots. The shareholder vote will be held Sept. 12.

Dell rose 5.6 percent to $13.68, just 7 cents shy of the offer price. Before today, Dell shares had been trading below the original $13.65 offer price since April, signaling investors weren’t confident about the buyout group’s ability to get the deal done, nor in alternatives proposed by Icahn.

The sweetened bid won over Matt Halbower, founder of Pentwater Capital Management LP, a Chicago-based investment firm with $2.9 billion in assets under management. While he was previously opposed to the deal, he’s now voting his 29 million shares in favor of the transaction.

“It is a fair result,” said Halbower. “I am confident a majority of the Dell shareholders will agree and the vote will be successful.”

BlackRock’s Position

The improved offer, coupled with a deteriorating market for the computer maker, is probably sufficient to win over large institutional investors who were on the fence before, said the person familiar with BlackRock’s position. BlackRock, which initially opposed the deal and then changed its position, plans to back the new offer, said the person, asking not to be identified because the voting isn’t public.

Lauren Post, a spokeswoman for BlackRock, declined to comment on how the firm will vote.

Founder Dell is personally financing the extra dividend, or $230 million, by taking a further discount on his 15.6 percent stake, according to a person close to the situation. Dell who rolled his stake into the original deal at $13.36 a share, is now doing so at about $12.52, said the person, who asked not to be named because the matter is private.

Hawaii Talks

Michael Dell and Egon Durban, the Silver Lake partner leading negotiations for the private-equity fund, hashed out the new deal with the board while they were in Hawaii, said the same person. They reached an agreement on July 31 and hammered out the final details yesterday, the person said.

The offer replaces a bid of $13.65 a share for the personal-computer maker, which shareholders were scheduled to vote on today at Dell’s headquarters in Round Rock, Texas. With the new proposal, shareholders also would be guaranteed to receive an 8-cent dividend next quarter, in line with previous periods.

The new offer adds as much as $470 million to the original bid, including the special dividend and the third-quarter payout, the board committee said. The total includes the $120 million value of the quarterly dividend.

The new offer “is not a step change,” said Richard Nield, a manager of Atlanta-based Invesco Ltd.’s $6.6 billion International Growth Fund. “I sense shareholders have grown frustrated about the lack of an attractive bid by the Icahn-led group and I could see the shares gradually fall to the $10-$11 level if Michael Dell’s bid is rejected.”

Transformative Deal

Nield didn’t say if he would support the vote. Invesco held 1.1 percent of Dell’s shares as of March 31, according to data compiled by Bloomberg.

By taking the PC maker he started in 1984 private, founder Dell is seeking to transform it into a bigger provider of hardware, software and services for corporate-data centers, after years of ebbing sales and profit as consumers shift away from PCs toward computing on smartphones and tablets.

Icahn and fellow Dell investor Southeastern Asset Management Inc. have made a series of alternative proposals to derail a takeover by Chief Executive Officer Dell, including a $14-a-share buyback. Icahn asked the board to hold the annual meeting -- when shareholders would vote on his proposal if the LBO failed -- at the same time as the vote on the LBO. The board, however, scheduled Dell’s annual meeting for Oct. 17. Southeastern and Icahn objected to the new offer and revised voting rules in separate statements today.

Dell ‘War’

“We believe that an increase of a mere 13 cents is an insult to shareholders,” Icahn said in his statement. “The war regarding Dell is far from over.”

Because Michael Dell isn’t a controlling stockholder, the changes aren’t particularly significant for the court, said Widener University law professor Larry Hamermesh in a phone interview today. “I don’t think it raises a red flag, or even a pink flag, maybe a light rose-colored one.”

Shareholders have sued Dell officials in federal court in Houston, and at least 20 other Delaware Chancery suits are pending. The investors contend Dell board members are duty-bound to get the top price, and have shirked their responsibilities.

Some of the most vocal opponents of the Dell buyout conceded the momentum may have shifted. Donald Yacktman, president of Yacktman Asset Management Co., said the new offer doesn’t change his opposition to the deal, though it may sway enough investors to get the buyout done.

‘Significant Downside’

“There is no increase in valuation being paid,” Stephen Yacktman, his son and a portfolio manager at the firm, said in an e-mailed statement. “Shareholders are just getting paid with their own money.”

Even so, there may be a limit to how far Icahn and other opponents will go to block the deal, according to Jeff Fidacaro, an analyst at Monness Crespi Hardt & Co.

“He understands the alternative is that the deal does not get done, and there could be significant downside with the stock closer to $10 a share,” Fidacaro said in an interview.

Once the world’s top supplier of PCs, Dell has spent billions of dollars on acquisitions over the past five years to add enterprise computing hardware, software and services, though the deals have yielded little return for investors. Meanwhile, the company has ceded the fast-growing mobile-computing market to Apple Inc. and devices running Google Inc.’s Android operating system.

Since announcing the buyout Feb. 5, the company’s special committee has argued that the company’s prospects of a turnaround are better outside of the public lens.

“At this point, the momentum has clearly shifted toward Michael Dell,” Angelo Zino, an analyst at S&P Capital IQ in New York, said in an interview. “Just 24 hours ago it looked really bleak for him.”

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