Michael Dell Faces Bruising Fight With Icahn, Southeastern for Company

By Jeffrey Burt  |  Posted 2013-05-11

Michael Dell Faces Bruising Fight With Icahn, Southeastern for Company

Michael Dell's battered effort to buy his namesake company for $24.4 billion and take it private, which has been under siege by unhappy shareholders and competing bids since it was announced in February,  is about to get more difficult.

The CEO has known about the opposition from some larger shareholders since just days after the proposed deal was announced, and bids by other organizations—most notably Blackstone Group—have come and gone.

But now activist investor Carl Icahn and Southeastern Asset Management—one of the early and most vocal opponents of Michael Dell's plans—are making their own bid to buy the world's third-largest PC maker. They want the company's board of directors to put their bid next to Michael Dell's for a vote before all shareholders. Otherwise, they will work hard to spike Michael Dell's offer and to get their own slate of 12 directors voted to the board.

In a lengthy, strongly-worded letter sent to the current board May 9, Icahn and Southeastern laid out a competing bid that they said is far superior to Michael Dell's, which they call a "giveaway agreement."

"We are often cynical about corporate boards but this Board has brought that cynicism to new heights," they said in the letter, which was included in a filing with the Securities and Exchange Commission and signed by Icahn and G. Staley Cates, president and chief investment officer at Southeastern. "This company has suffered long enough from very wrong-headed decisions made by the Board and its management. Do not make another by putting the company through an unnecessary debilitating proxy fight.  Allow the shareholders to decide for themselves which offer they choose."

For the past several years, Michael Dell and other company executives have been working to transform Dell from a maker of commodity PCs to more of an enterprise IT solutions and services provider. Like other tech vendors like Intel and Hewlett-Packard, Dell has seen its financial numbers impacted by the continuing sales declines in the global PC market.

Through in-house development and acquisitions, Dell has looked to build its capabilities in such areas as networking, storage, software, security and services.

In February, Michael Dell and equity firm Silver Lake Partners announced a bid to buy the company in a leveraged buyout for $13.65 a share. The CEO has argued that taking the company private would enable him to accelerate the transformation of Dell outside of the glare of Wall Street.

Southeastern and other investors, including T. Rowe Price, quickly came out against the plan, saying it greatly undervalued the company and would benefit Michael Dell and Silver Lake at the expense of shareholders.

With this latest bid, Icahn and Southeastern—which hold about 13 percent of outstanding shares in the company—are making a move they say will benefit investors.

"The shareholders in this case are literally getting screwed," Icahn said May 10 during an interview on CNBC. "You can camouflage it with numbers or whatever, but $13.65 is a giveaway. … This is what we call the great giveaway."

In the Icahn-Southeastern deal, shareholders could either get a $12-per-share cash dividend or receive $12 in additional shares for $1.65 a share. Icahn and Southeastern both will opt for the shares, not the cash, they said. They would finance the proposal using available Dell cash and about $5.2 billion in new debt.

"We have great respect for Michael Dell for creating and building Dell and also for the 'negotiating' ability he has shown in getting his Board to grant to him this almost absurd bargain," the bidders wrote in their letter. "However, we believe all shareholders (at their discretion) should have the opportunity to participate in the upside potential we believe is present, not solely Michael Dell and an opportunistic buyout group leveraging to the hilt the company's own assets with very little of their own equity."


Michael Dell Faces Bruising Fight With Icahn, Southeastern for Company

In the letter, Icahn and Southeastern had harsh words for both the board and Michael Dell. They criticized the board for not only agreeing to the CEO's bid, but also agreeing to pay him hundreds of millions of dollars should the deal not go through. They said they didn't understand why, when Michael Dell and Silver Lake approached them with the offer, the directors wouldn't give shareholders the option of accepting it or give them another alternative—like theirs—that gave investors money and enabled them to continue profiting if the company prospered.

"After all, many loyal shareholders held on while management and the Board oversaw the decline of the company these many years," Icahn and Southeastern wrote. "Instead, astonishingly, we believe the Board basically said 'thank you Michael for offering to purchase the company with the shareholders' own money at a bargain price and, by the way, if anyone dares to offer a higher value like our proposal and you don't want to compete with it, have no fear because we will award you a break-up fee of up to $450 million. And even if we find the competing offer to be a "superior offer," we will still pay you at least $180 million.'"

They also said they saw a lot of potential for Dell and its transformation efforts. There also are opportunities to pare away "excessive and bloated overhead" and the possibilities of spinning off business units that no longer are part of Dell's core efforts.

"Most importantly, we note Dell is not solely a cost story," they wrote. "Dell is a proud 29-year-old global brand with key relationships with some of the world's most dynamic suppliers (including Microsoft and Intel which have a vested interest in Dell's success), enterprises (small, medium and large), and individual loyal customers.  We truly believe the best days for Dell are yet to come and the company has a tremendous opportunity to build on its strong platform."

However, if Icahn and Southeastern have their way, those best days will be without Michael Dell.

"You need a new CEO," Icahn told CNBC. "You'd need to change the culture. … If our board's elected, he's not going to be running the company. That, I can guarantee 100 percent."


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