Michael Dell Bets on Rule Change in Final Push for Deal Approval

When all else fails, change the rules.

After weeks of failing to garner enough support among shareholders for his bid to buy Dell Inc., founder Michael Dell is now trying to persuade board members to approve a voting rule change that would boost his chances of completing the takeover.

As an enticement, Dell and financial ally Silver Lake Management LLC yesterday said they would raise their bid by a dime to $13.75 per share, or $24.6 billion, if Dell’s special committee changed the rules so that nonvoters wouldn’t count as opposing the deal. The original rules “skew the playing field,” he said in a letter to shareholders last night.

The board’s initial response wasn’t favorable, according to a person familiar with the situation. It might agree to altering the voting terms if the bid was at least $14 a share, the person said. The special committee rescheduled yesterday’s already-postponed investor vote to Aug. 2, giving Michael Dell another week to scrounge for votes if the board rejects the change.

“I am at peace either way and I will honor your decision,” Dell, 48, wrote in his letter, in which he also said that his $13.75 bid was his best and final offer.

His proposed rules maneuver is an attempt to break a stranglehold that nonvoters have had on the success of his bid for the Round Rock, Texas-based computer maker he founded 29 years ago. He and Silver Lake had agreed to the counting provision when they signed the leveraged buyout deal with Dell’s board in February.

Seeking Votes

A majority of investors, excluding Dell’s 15.6 percent stake, are needed to approve the deal, meaning only about 43 percent of all holders can block it.

About 27 percent of shares -- not including Michael Dell’s holdings -- haven’t been voted, the buyers said in a statement yesterday, so they are counted as “no” votes. In addition, investors opposed to the CEO’s transaction owned more than 20 percent of Dell shares as of early July, according to a report from shareholder adviser Glass Lewis & Co., which backed Dell’s original bid with Silver Lake.

“If he gets the voting rule changed, it’s a game changer, and I think the deal is a done deal,” said Angelo Zino, an analyst at S&P Capital IQ in New York.

Counting nonvoters thwarts “the will of the majority,” Dell and Silver Lake said in pressing for the rule change. “If this majority wishes to accept our offer, it is only fair to permit them to do so,” they said in a statement yesterday.

Less Protection?

The original provision would have helped the transaction fall under the protection of the the business-judgment rule as interpreted by the Delaware courts, said Erik Gordon, a business professor at the University of Michigan.

If the buyout complied with that rule, it would make it more likely that Delaware judges would defer to the board's actions and not subject the deal to heightened scrutiny, Gordon said. Like many Fortune 500 companies, Dell is incorporated in Delaware and disgruntled shareholders have already filed suit there seeking to block the transaction.

“Michael Dell is risking losing the protection of the business judgment rule in return for an easier vote rule,” he said. “The real big thing here is: ‘Wow, he just doesn’t think he has the votes and is willing to take a risk that is rarely taken in order to try to get this deal done.’”

David Frink, a spokesman for Dell, declined to comment.

Billionaire Carl Icahn, who holds an 8.7 percent Dell stake, and partner Southeastern Asset Management Inc. have made a series of alternative proposals to derail the bid, most recently suggesting that the company repurchase most of the outstanding shares at $14 apiece and offer some warrants.

Crossing Rubicon

Icahn, 77, said yesterday that changing the rules of the vote would remove an important shareholder protection. He reiterated that the offer undervalues the company and called for the CEO and the board to be replaced.

“We have spent the past six months explaining why we believe that not only does the Michael Dell/Silver Lake transaction undervalue the company, but it also freezes out loyal stockholders who deserve the opportunity to stay with Dell,” Icahn said in a letter. “Today, Michael Dell and Silver Lake crossed the Rubicon by trying to take away the one provision in the merger agreement that actually provided stockholders with a voice in their company. It is time for Michael Dell and this board to go.”

In his shareholder letter, Dell said Icahn’s proposals to recapitalize “would be destructive to the company” and he won’t support them.

Potential Opposition

In addition to Yacktman Asset Management Co., opponents may also include Harris Associates LP and Pzena Investment Management Inc., according to the report by adviser Glass Lewis.

Separately, T. Rowe Price Group Inc., which holds 4.1 percent, reiterated its opposition to the Dell-Silver Lake offer, saying the previous buyout offer didn’t “reflect the value of Dell.”

BlackRock Inc., Vanguard Group Inc. and State Street Corp., three of Dell’s largest shareholders, indicated last week that they’re voting in favor of the Silver Lake-led deal, according to a person with knowledge of the matter. BlackRock had previously been leaning against the buyout, another person said. Those funds, like any Dell shareholder, can still change their votes before the final tally.

The new offer from Michael Dell and Silver Lake is 26 percent more than the computer maker’s closing share price of $10.88 on Jan. 11, the last trading day before news of a deal surfaced. Dell had originally planned a shareholder vote on the buyout last week and rescheduled that to yesterday after it was unable to secure enough support.

Since announcing the buyout Feb. 5, the special committee of Dell’s board has argued that the company’s prospects of a turnaround are better outside of the public lens, a point Michael Dell made again in his shareholder letter.

“We need to transform, and we need to do it quickly,” he wrote. “The transformation is not without risks and challenges, and I believe that we can do what we need to do better as a private company than a public company.”

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