Icahn's Challenge to Dell Deal Dies With Judge's Ruling

By Jeffrey Burt  |  Posted 2013-08-19

Icahn's Challenge to Dell Deal Dies With Judge's Ruling

Michael Dell should be looking at a clear runway to buying his namesake company and taking it private, barring any unforeseen problems.

Between the agreement he reached with Dell’s board of directors earlier this month and the recent court ruling against activist investor Carl Icahn, Michael Dell will most likely see his $25 billion bid to buy the PC maker accepted by most shareholders when they vote Sept. 12, a proposal that Icahn has worked for months to derail.

Icahn’s last credible shot at stopping the deal ended Aug. 16, when Delaware Chancellor Leo E. Strine Jr. rejected his request to expedite the lawsuit in which he claimed the board’s Special Committee was wrong to renegotiate the terms of the deal with Michael Dell, as well as Icahn’s attempts to have the investor vote on the deal run the same day as the company’s annual shareholders’ meeting.

Strine instead sided with the Special Committee, saying the group appointed by the board to deal with Michael Dell and financial backer Silver Lake Partners had done a good job negotiating the process. The chancellor’s ruling essentially did away with Icahn’s only real chance to stop the proposal.

“Home free—maybe I wouldn’t quite use that term yet,” Roger Kay, principal analyst with Endpoint Technologies Associates, told eWEEK. “But as far as major obstacles [still in the way], I don’t see that.”

Rob Enderle, principal analyst with the Enderle Group, noted Icahn’s Tweet Aug. 13 that he had taken a “large position” in consumer tech giant Apple, and that he believes the company is “extremely undervalued.”

“Icahn is litigious, so he could continue to be a pain,” Enderle said in an email to eWEEK. “However, he appears to have shifted focus to Apple of late, which is bad news for [Apple CEO Tim] Cook but good for Dell. The [Strine] ruling and changes [to Michael Dell’s bid] should allow Dell and Silver Lake to close the deal.”

The CEO’s plan to buy the company and take it private has been under pressure since it was first announced in February. Some major investors complained that the $13.65-per-share offer was too low and that it undervalued the world’s third-largest PC maker, and promised to vote against it. After several months, Icahn emerged as the key opponent, harshly criticizing the board, Michael Dell and the offer and proposing a counterbid that would pay $14 a share and keeping the company public.

Michael Dell has argued that taking the company private offers the best way for executives to accelerate Dell’s restructuring from primarily a PC company to an enterprise IT solutions and services vendor. Endpoint Technologies’ Kay said the plan is not guaranteed to work, but that for a company like Dell—whose fortunes are being hammered by the decline in the PC market, and which needs to invest a lot of money if it hopes to make the transition work—there are few alternatives.

“It’s the best course available to the company,” Kay said. “It’s very ambitious.”

Icahn’s Challenge to Dell Deal Dies With Judge’s Ruling

Dell will have to sacrifice profits in the short term in order to make the transformation, and could end up as a smaller company, he said. That is difficult to do if executives have to unveil their financial numbers to Wall Street analysts every three months. Private companies don’t have to worry about what those financial analysts have to say.

“As a private company, they can do that,” Kay said of spending money despite the negative impact it would have on profits. “As a public company, it’d be a total failure. …  As a private company, you don’t have to please Wall Street. You just have to pay your bills.”

Enderle said the second-quarter financial numbers released by Dell last week—profits fell 72 percent, thanks to poor PC sales—illustrate the problems the PC maker faces as a public company.

“The recent earnings numbers absolutely support the plan,” he said. “They need substantial reorganization and the numbers showcase they are trying to hold onto share but sacrificing profits to do so. That’s treading water. [As a] private [company], they could focus on building a very different business and not worry as much about quarterly profits for a time. While not absolutely necessary, going private removes much of the complexity and distraction surrounding a major company restructure and they need every advantage as these are very difficult to pull off.”

Michael Dell’s deal for a while was in trouble. However, he and Silver Lake upped their offer to $13.75 per share, and the Special Committee agreed to change the voting rules so that shares that weren’t voted weren’t automatically counted as “no” votes. The change essentially ensures that Michael Dell’s offer will garner the majority of votes.

And now the Delaware Court of Chancery has removed Icahn as a threat to the deal. However, as the second-largest shareholder after Michael Dell, Icahn promises to reap millions even when the Dell-Silver Lake bid goes through.

And according to Kay, that is pretty much what Icahn was shooting for in the first place, the chance to increase the money paid to shareholders. As with similar battles he’s had with other companies, Icahn in the end wants a solid pay day, Kay said.

“Even though he rattles his sabers … it’s just a feint,” Kay said. “He doesn’t want to run a computer company. Just the opposite. … Michael Dell wants to run this company.”

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