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The latest agreement between Michael Dell and the special committee charged with steering the PC maker’s future should be enough for the CEO to get the necessary shareholder votes to buy the company and take it private, according to industry observers.
It also should be enough to keep activist investor Carl Icahn at bay, despite his furious efforts over the past few months to derail the bid.
“This is a compromise that will be beneficial to both [Michael] Dell and [financial backer] Silver Lake and to Dell’s shareholders,” Charles King, principal analyst with Pund-IT Research, told eWEEK. “The momentum is heading back toward Michael Dell. Icahn might threaten legal action, but I don’t know how realistic that is.”
For the past several weeks, it appeared that the $24.4 billion offer put together by Michael Dell and Silver Lake Partners for Dell’s namesake company was heading for the ditch, undone by a block of large institutional investors—including Icahn—who promised to vote against it. They claimed the money offered undervalued the company and a voting rule that would make it nearly impossible for the CEO to get the necessary 42 percent of shares in his favor.
However, after back-and-forth negotiating in public between Michael Dell and the special committee, a near-constant barrage of criticism from Icahn and months of behind-the-scenes shareholder lobbying, the two sides reached an agreement Aug. 2 that will bring more money to investors and ease the onerous voting rules for Michael Dell.
The CEO and Silver Lake agreed to increase the price from $13.65 per share to $13.75, plus another 13 cents per share when the deal closes, and another 8 cent-per-share in a third-quarter dividend, all of which added about another $470 million for investors.
In return, the special committee agreed to a change in the voting rules that only shares voted for or against the deal would be counted. Previously, any share not voted would be automatically put into the “no” column. About 25 percent of shares had yet to be voted, making it almost impossible for Michael Dell to get the necessary 42 percent of shares on his side. The CEO had argued it was unfair that such a percentage of non-voters could spike the deal even if those shares in favor of the deal outnumbered those against.
Icahn and other opponents represent about 20 percent of the shares.
Rob Enderle, principal analyst with The Enderle Group, said making the rule change was critical.
“It it all hinges on the rule,” Enderle said in an email to eWEEK. “The combination of summer, folks not bothering to vote and some screwy belief that you might make more money if you didn’t vote were creating too many no votes even though most appeared to actually want the deal.”
Michael Dell’s bid was controversial from the moment it was announced in February, with some investors saying the company was worth more than what was being offered. Pund-IT’s King said the CEO’s decision to raise the price of the deal will help swing a number of those investors in favor of the bid.
Icahn, who with Southeastern Asset Management has made its own bid to buy Dell, is undeterred by the new deal. In a Twitter post Aug. 2, he said: “We are pleased to have won another battle in the Dell war, but the war itself is far from over. More to follow.”
Michael Dell’s Sweetened Offer Should Close the Deal: Analysts
He announced Aug. 1 that he was filing a lawsuit against Dell and the board to prevent any changes in the rules around the proposal, and to push to have the vote—which had been twice delayed already—go as scheduled Aug. 2. However, part of the deal struck between Michael Dell and the special committee put the vote off again until Sept. 12, and made it so shareholders who bought stock up until Aug. 13 can vote. Previously, the cutoff date was June 3.
“I think he will do whatever he can to get the deal to go his way, but at this particular point, his options are becoming increasingly limited,” King said.
Another option is to declare victory in getting more money out of Michael Dell and Silver Lake and move on.
“That would be the wise move,” Enderle said. “He has made a decent profit. Why waste it on pointless litigation? I think what he does will tell us if he is shrewd or another crazy rich guy with too much time on their hands.”
Both analysts also said Michael Dell’s desire to take the company private in hopes of accelerating its transformation from a PC maker to an end-to-end enterprise IT vendor—and to do so out of the glare of Wall Street—makes sense, and that they were optimistic he can pull it off.
It’s not unlike what other top-tier vendors—including Hewlett-Packard, Cisco Systems and EMC—are doing as they look to expand their presence in the data center, King said.
“It’s perfectly logical and the type of strategy that is happening across the industry right now,” he said, noting that it’s similar to what IBM did more than a decade ago. “It’s not rocket science. It’s a reflection of the way the larger industry is going.”
“Basically, he is returning the company to late start-up class and getting out from under the thumb of having to focus excessively on quarterly returns” as all public companies must do, Enderle said. “Turnarounds aren’t simple or easy, but [taking Dell private] will make it far easier.”
He pointed to Hewlett-Packard as a company trapped by the demands of Wall Street.
“One if their big problems is they need to make big moves like spinning out printing, but that business represents so much cash and profit, they can’t get rid of it because they’d get killed by the analysts if they did, even though it would be the right thing to do,” Enderle said. “Dell wants to be able to prune and add with his eye on the future without having to worry about being pummeled because quarterly numbers get hit in the process.”
For example, if Dell wants to try to another push into the mobile device space for the long-term good of the company, he can do so without having to worry about the short-term gains demanded by Wall Street.
“If he wants to make another run at mobile, he’ll have to make Samsung-like marketing investments for a year or so, which would cripple his bottom line during the time he is fighting Apple and Samsung,” Enderle said. “He can’t do that as a public company. So while the move doesn’t assure a turnaround—nothing really does—it makes success far more likely, particularly if success also means some kind of measurable market dominance.”