Icahn's Dell Campaign Shows Activism (of a Sort) Is Back

Carl Icahn, billionaire investor Photograph by Scott Eells/Bloomberg

Pyongyang’s top muralist could do a fine job illustrating the ideal that is shareholder democracy. Picture students, workers, and retirees brandishing stock certificates while lording over America’s smokestacks, servers, and grain elevators, as well as the sausage extruders of Iowa and Wall Street. All while C-suite executives serve them sweet iced tea. The very laudable fable is that we, the shareholding people, ultimately own public U.S. companies. They answer to us and operate at our pleasure. Mess up or waste our money and we’ll vote you out.

In reality, shareholder activism is the bailiwick of a handful of expensive, exclusive hedge funds and other rarefied institutions that are lopsidedly invested in specific positions. Think Carl Icahn, Bill Ackman, David Einhorn, and Nelson Peltz—not Fidelity and Putnam. After all, mutual funds are often too diversified to fixate on individual holdings, and too leery of blowing due diligence money and potential corporate-client goodwill on campaigns that won’t move the needle on their big funds. They can less afford to do so now that ultracheap, unmanaged, and all-owning index funds are annexing so much market share.

Still, you can feel a resurgence of shareholder activism these days—particularly the “hand the money over now” variety. It’s natural in an up market, where it’s harder for investment managers to explain lagging performance to clients. “I think the movement is real and is a function of the need for growth in a low nominal [interest rate] world,” says Jason Trennert of Strategas Research Partners.

Some see it as selfish opportunism, calling yourself a shareholder rights person when the real motivation is to get some pop on a stock you’ll soon blow out of anyway. The chief judge of Delaware Chancery Court and Marty Lipton, the country’s best-known corporate lawyer, are calling out hedgies who get in and out of companies, exacting damage on the financials and operations with little regard for long-term viability.

Witness what’s happening at the crux of the once-great personal computer rivalry of Dell vs. Hewlett-Packard—and the category’s big disruptor, Apple, which has the embarrassment of a cash balance that’s a third of its $400 billion market capitalization.

Dell thought it had secured its future as a private company, taken out at $13.65 a share by Chief Executive Officer Michael Dell and Silver Lake Management. But that price is opposed by big holders such as Southeastern Asset Management and T. Rowe Price Group, which say the deal undervalues the company. They now have the firepower from activist howitzer Carl Icahn, who bought a chunk and is now engaging (to use the euphemism of the trade) Dell management to instead pay a special dividend of $9 a share to shareholders. The stock now trades 5 percent above its go-private price, which means the market is expecting something north of the original offer.

In his letter last week to the company, Icahn wrote:

“If this Board will not promise to implement our proposal in the event that the Dell shareholders vote down the Going Private Transaction, then we request that the Board announce that it will combine the vote on the Going Private Transaction with an annual meeting to elect a new board of directors. We then intend to run a slate of directors that, if elected, will implement our proposal for a leveraged recapitalization and $9 per share dividend at Dell. … In that way shareholders will have a real choice between the Going Private Transaction and our proposal.

If you fail to agree promptly to combine the vote on the Going Private Transaction with the vote on the annual meeting, we anticipate years of litigation will follow challenging the transaction and the actions of those directors that participated in it. We see no reason that the future value of Dell should not accrue to ALL the existing Dell shareholders—not just Michael Dell.”

It’s fair to ask what took Icahn and his number crunchers so long. Dell was under $9 a share as recently as last November. If he loves it here, surely he adored it there? Then again, does Icahn really “lose” his $9 special dividend campaign if Dell’s current buyout consortium throws in a couple more dollars of consideration?

As columnist Bill Cohan explains, “These days, one popular hedge-fund strategy is to take a position and then publicly announce it—while also often explaining your investment thesis in detail. The goal in doing so is presumably to persuade others to make similar bets, thus driving the stock in the desired direction.”

Dell’s Special Committee is “currently conducting a robust ‘go-shop’ process to determine if there are third parties interested in proposing alternative transactions that could be superior for Dell’s public shareholders to the going-private transaction,” said the committee in a statement. “And we welcome Carl Icahn and all other interested parties to participate in that process. … Our goal is to secure the best result for Dell’s public shareholders—whether that is the announced transaction or an alternative.”

Witness, in parallel, how hedgie David Einhorn is proposing that Apple issue tens of billions in preferred stock to unlock as much as $320 in additional share price. Like Icahn, he is presumably not engaging Cupertino on product development and form factors.

It is unlikely that one shareholder can convince management of one of the world’s largest corporations to go whole-hog financial. But if Apple does come out and goose its dividend or otherwise spend much more of its $137 billion cash hoard and free cash flow, Einhorn gets a modicum of victory.

Meanwhile, following the billions that Dell and Apple competitor Hewlett-Packard squandered on bad deals and short-lived CEO visions, some of its institutional shareholders are now targeting the directors that chair its audit and finance committees. Just don’t ask where these HP aspersionists were as the horrors of the past three years were taking place, slicing off tens of billions of their shareholder value.

Springtime for activism, all kinds welcome.

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