Dell Investor Suit Says Founder’s Buyout Bid Is Too Low

Dell Inc. founder Michael Dell, the company’s board and private-equity partners backing Dell’s bid to take the computer maker private were sued in Texas by investors seeking to block the deal.

Shareholders, led by a private investor and the Mid-South Iron Workers Pension Fund, said the founder’s $24.4 billion offer is underpriced when measured against Dell’s recent stock buyback program and competing valuations proposed by major stakeholder Carl Icahn, according to the complaint filed yesterday in federal court in Houston.

“After his failed management choices led to significant losses for Dell and a resulting decrease in the company’s stock price, defendant Michael Dell is now attempting to take advantage of the company’s distressed stock price to buy the company on the cheap just as it is starting to experience a turnaround,” John Michael Van Buiten, an investor who seeks to represent other shareholders in a class action, said in the complaint.

A similar complaint was filed in Delaware Chancery Court in February.

Dell and Silver Lake Management LLC’s offer of $13.65 a share to take the company private represents a 27 percent discount from the company’s 2012 share price, rather than the 25 percent premium Chief Executive Officer Michael Dell portrays it to be, according to the Texas complaint. Over the last two years, Dell has been aggressively repurchasing stock at an average price of $15.25 a share, the investors said.

Fiduciary Duty

The shareholders also claim the board violated its fiduciary duty by failing to solicit or consider competing bids that didn’t allow Michael Dell to “gain a controlling stake in the company and remain as CEO.”

In a buyout by the Michael Dell group, the implied savings of $1.60 a share at the lower price to acquire about 1.74 billion company shares outstanding would be almost $2.8 billion. The CEO and family trusts would put more than 273 million shares into the new company, according to the latest proxy statement for the deal filed today.

The $2.8 billion savings is partly Michael Dell’s, enabling him to control the company for less.

In the proxy, Dell relates how adviser JPMorgan Chase & Co. gave a gloomy assessment of the company to a board committee at a September meeting. The bank highlighted managers’ shortcomings, “specifically, the company’s failure to meet management and consensus analyst quarterly expectations,” and risks facing Dell in changing its focus from personal computers to more profitable enterprise storage and services, the proxy says.

Competitive Harm

JPMorgan also noted “the absence of any stated third-party interest in acquiring the company over the prior two-year period,” Dell’s proxy says. On the subject of inviting bids, the committee discussed “the potential risk of competitive harm” if an offer wasn’t made “and the increased risk of leaks, which could create instability among the company’s employees as well as its customers and vendors,” according to the proxy.

In a letter to shareholders today, Dell’s board committee asked them to vote for the CEO’s deal. The committee said it negotiated $4 billion of price increases with Michael Dell and Silver Lake Management while contacting 73 other companies and investors.

“No superior offer has materialized,” the committee said in the letter filed with regulators.

Competing Offer

Icahn, the billionaire financier, has proposed a competing offer that would pay investors $12 a share in cash or stock while letting them retain stakes in a public company. Private-equity firm Blackstone Group LP had also researched a possible bid for Dell before withdrawing last month.

Silver Lake Management, Michael Dell’s private-equity partner, is contributing about $1 billion in cash toward the proposed acquisition. The firm is named in the suit along with three private-equity entities partly owned by Michael Dell.

Michael Dell is seeking to buy the Round Rock, Texas-based computer maker he created in 1984 so it can remake itself without the pressure of being public as it struggles to compete against smart phones and tablets. He owns 15.6 percent of the company.

At the time Dell’s buyout bid was unveiled in February, company shares had lost more than half their value since January 2007, when Dell resumed his role as CEO, amid investor dismay with management’s failure to cope with upstart competitors in mobile and cloud computing.

The case is Van Buiten v. Dell Inc., 4:13-1585, U.S. District Court, Southern District of Texas (Houston).

Before it's here, it's on the Bloomberg Terminal.