Dell Wins Support From ISS for Buyout
Michael Dell won support from Institutional Shareholder Services Inc. for the $24.4 billion buyout of his company, a surprise endorsement from an influential shareholder adviser that increases the chances he will prevail.
Dell and Silver Lake Management LLC’s buyout plan would shelter shareholders from risks tied to the deteriorating personal-computer business, ISS said today. As recently as last week, ISS was leaning against recommending Dell’s offer, people familiar with the matter said at the time. Glass, Lewis & Co., another shareholder adviser, also backed the buyout proposal.
Backing from ISS provides more ammunition to Michael Dell, who wasn’t planning to sweeten the bid, as he seeks support ahead of a shareholder vote set for July 18. Dell is fending off a challenge from billionaire investor Carl Icahn, who said last week that he obtained $5.2 billion in debt financing to support his third and latest effort to derail the CEO’s proposed buyout. Today the special committee reiterated its support for the founder’s offer.
“The ISS vote is a positive for Dell and Silver Lake,” Jeffrey Fidacaro, an analyst at Monness Crespi Hardt & Co., said in an interview. “They may not feel like they actually need to raise the deal if ISS is agreeing with them.”
Institutional investors look to ISS’s findings for guidance on how to vote their shares, and its recommendations often sway the outcome. Dell’s special board committee overseeing the buyout negotiations appealed to shareholders for support in a July 5 filing, seeking to blunt the influence of an anticipated rejection by ISS.
The special committee, which is now meeting with Dell’s major shareholders to seek their support for the deal, is encouraging Michael Dell to do the same separately, as it previously asked him to meet with ISS, according to a person familiar with the situation. Silver Lake declined to take part in these meetings because it regards itself as a minority investor in the buyout effort, according to the same person, who asked not to be identified because these meetings are private.
“We are pleased that ISS has recommended, as we have, that Dell shareholders approve the $13.65 per share cash sale transaction,” the special committee of Dell’s board said in a statement today. “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.”
Icahn had attempted to scuttle the management buyout efforts alongside Southeastern Asset Management Inc., one of Dell’s top outside shareholders. Shareholders such as Pzena Investment Management Inc. (PZN) and Yacktman Asset Management Co. also had voiced opposition to the takeover, according to regulatory filings.
In a statement today, Icahn and Southeastern said they disagreed with the ISS recommendation. “We continue to believe that Dell’s owners deserve better and can achieve more by voting against” the buyout, they said in the statement.
Icahn and Southeastern Asset Management, who plan to vote against the proposed buyout, own a combined 12.8 percent stake in Dell. That’s not enough to defeat the buyout proposal, which must pass with a majority of votes excluding CEO Dell’s stake in the company. Investors who owned the stock as of June 3 are eligible to vote their shares.
Icahn and Southeastern have at least one Dell shareholder in their corner. Yacktman said in a statement today that it supports the proposal from Icahn and Southeastern instead of the buyout offer from CEO Dell and Silver Lake. The proposed buyout “is at the expense of Dell shareholders,” while the Icahn and Southeastern proposal gives “the opportunity for positive change,” Yacktman said. The firm owns less than 1 percent of Dell’s shares, according to data compiled by Bloomberg.
Officials at Pzena didn’t immediately return calls seeking comment.
Among its reasons for supporting the buyout, ISS cited a 25.5 percent premium to Dell’s unaffected share price before the transaction was proposed and the certainty of value provided by an all-cash offer.
“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.
CEO Dell and partner Silver Lake proposed repurchasing shares at $13.65 each. Michael Dell is contributing his 16 percent ownership in the company at $13.36 apiece and another $750 million in cash.
Icahn has pressed Dell to buy back about 1.1 billion shares at $14 apiece, while leaving the remainder of the company public. Icahn has said Dell has a brighter future ahead and current shareholders should have the chance to participate in a turnaround.
Icahn and Southeastern’s proposal “is not as lucid, transparent, certain or common as a management buyout and, ultimately, is less likely to be effective or to deliver more value,” Glass Lewis wrote in its report today.
The CEO’s proposal requires approval by a majority of holders excluding Michael Dell. For Icahn’s plan to succeed, he must convince shareholders to reject Dell’s buyout. Then, Icahn needs shareholders to back his efforts to gain control of the board in a proxy contest that will count Michael Dell’s vote.
“If you look at it, it shows that ISS did their homework,” Brian Marshall, an analyst at ISI Group, told Erik Schatzker on Bloomberg Television’s “Market Makers.” “This is the most challenging company in our coverage universe. You have to take the $13.65 per share bid and run for the hills.”
Michael Dell has said taking the company private will let him rebuild it as a supplier of data-center equipment and software to curb reliance on the flagging PC market after years of lackluster growth.
Silver Lake and Dell weren’t planning to raise their buyout offer even if ISS recommended against the plan because the proposal they made in February represents a fair and significant premium to where the stock would trade if the deal fell apart, people with knowledge of the situation said July 5.
Dell’s woes have been compounded as the PC market has declined. PC shipments plummeted 14 percent in the first quarter, the steepest decline since market researcher IDC began tracking data in 1994. IDC, which projects that shipments will tumble 7.8 percent this year, is scheduled to release second-quarter PC market results July 10.
Dell, who founded the company in his University of Texas dorm room in 1984 and took it public four years later, rose to become the world’s top PC maker with a manufacturing system that turned out the machines faster and more cheaply than competitors. As the computing market has shifted toward mobile devices like tablets and smartphones, Dell has struggled to remake itself.
Sales in 2012 declined 8 percent to $56.9 billion and net income tumbled 32 percent to $2.37 billion. This year, Dell is expected to earn $1.44 billion, less than half seen in 2005, according to the average of analysts’ estimates compiled by Bloomberg.