Battle for Dell yet to power down

The founder of Dell sought this week to negotiate a surer path to victory for his takeover effort, offering a small increase in price in exchange for a more certain shareholder vote.

But it was not clear that the new bid by Michael Dell, the founder, would succeed, with a special committee of the company’s board hoping to squeeze a few more cents a share out of him.

In a letter to the committee that was disclosed on Wednesday, Dell and his partner, the investment firm Silver Lake, offered to raise their per-share offer a modest 10 cents, to $13.75 (€10.40), for a total value of $24.6 billion. In return, the two demanded that Dell must drop a rule that shares not cast either for or against the deal be counted as No votes.

Such a move would help the takeover bid succeed against a bruising challenge from recalcitrant shareholders, led by the billionaire Carl Icahn. Because Michael Dell’s 16 per cent stake cannot be counted in the vote, he and Silver Lake must win over more than 42 per cent of the company’s shares. Icahn and his main partner, Southeastern Asset Management, together own more than 12.5 per cent of the company’s shares, posing a formidable bloc of opposition.

The special committee did not indicate which way it would lean, but a person close to the committee, who spoke anonymously because the matter was confidential, said it hoped to see an offer of at least $14 a share before it agreed to changes in the voting procedure. In a statement, the committee said it had rescheduled a vote on the deal to August 2nd, the second time it moved the vote.

While Dell and Silver Lake had demanded that the special committee act by 6pm on Wednesday, they extended their offer to August 2nd.

Behind the move by Dell and Silver Lake is a desire to remove what they believe is a huge impediment to acceptance of their deal, according to people briefed on the matter. An unusually high number of shares – about 27 per cent – abstained from a recent preliminary tally.

Some of those shares are held by foreign investors, such as the Government of Singapore Investment Corporation, which tend not to vote in shareholder matters. Others are held in brokerage accounts where the ultimate owners are hard to determine.

Still more were held by shareholders as of June 3rd, the record date for the vote, but have since been sold. That means some investors of record no longer hold the shares and have no economic reason to vote in the deal.

Alternative transactions
Certainly, some shareholders who have abstained may have done so out of opposition to the takeover bid.

“Particularly given the efforts of others to promote alternative transactions, and the ability of those parties to vote their shares when my shares do not count, it makes no sense whatsoever to skew the playing field even further by counting shares not voting as if they supported the opposition group,” Michael Dell said in an open letter to shareholders that was issued on Wednesday evening.

“The decision is now yours,” he wrote. “I am at peace either way and I will honour your decision.”

In their own letter, Icahn and Southeastern said, “To change the rules at the last minute is outrageous.”

On the eve of a vote that was subsequently postponed, some big investors – including huge mutual funds run by the Vanguard Group and BlackRock – switched their votes to Yes. Some additional shareholders followed suit. But investors are free to change their minds until the vote is completed.

Dell and Silver Lake have argued that the hard work of transforming the company into a corporate software-services provider can succeed only away from the glare of the public markets and quarterly earnings calls.

The fundamental problem facing Dell is that sales of personal computers, which still count for more than 50 per cent of the company's revenue, have slowed as consumer spending has shifted to smartphones and tablets. According to Gartner, a technology market analyst, demand for personal computers fell nearly 11 per cent in the second quarter of this year.

When the takeover deal was announced in early February, it appeared that Dell was destined to be handed over to its founder. It was carefully composed over almost half a year, with tough negotiations between Dell and a special committee of directors that nearly broke off over price a number of times.

But some potential rivals emerged, including Icahn and an alliance led by the Blackstone Group, setting up a potential three-way race for a company that had fallen behind both Hewlett-Packard and Lenovo of China. Blackstone soon withdrew after a stream of bad news, including falling Dell earnings and dismal reports from analysts on the state of the personal computer industry. The board committee ultimately supported Michael Dell's offer, arguing that it was superior to alternatives, including those that would have kept the company public.

Biased
Icahn remained resolute in his opposition, however. He teamed up with Southeastern and said the board was biased towards its founder. He repeatedly called upon the company to instead borrow billions of dollars to finance a huge stock buyback to buy out investors at a premium while letting them keep a portion of their holdings and share in any revival the company enjoyed.

The Dell committee argued that such a plan was fraught with risk, pointing to multiple internal reports showing the company suffering further if it remained public. Icahn’s proposals, it said, also depended on investors throwing out the existing board and giving control of the company to him.

While Icahn has been critical of Michael Dell’s terms, he seems basically to agree about what the company needs to do. He says personal computers still have a place in the business world but need to be more tightly coupled with computer servers, software and networking gear. Dell has made the right kind of acquisitions, Icahn says, but he is not the man to save the company. – (New York Times)