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Michael Dell’s $24.4 billion bid to buy his namesake company and take it private received a significant boost July 8 when the influential Institutional Shareholders Service recommended that investors vote for the proposal over a competing one from Carl Icahn.
The ISS’ recommendation was somewhat surprising, given the reports last week that indicated the proxy service was leaning against the offer from Michael Dell and private equity firm Silver Lake Partners. The special committee appointed by the Dell board of directors to oversee the company’s future was so concerned that it reportedly had recommended to Michael Dell that he increase his $13.65-per-share offer, a suggestion that he and Silver Lake officials reportedly rejected.
The ISS could have some influence over investors who see the organization as an unbiased player in the contentious issue. Its recommendation comes 10 days before shareholders are scheduled to vote on Michael Dell’s offer, which has the backing of the board’s special committee but has been criticized by some larger investors as undervaluing the company.
The ISS pointed to the 25.5 percent premium shareholders would earn by accepting Michael Dell’s offer, and that by buying the company and taking it private, the CEO and Silver Lake would be taking on the risks associated with a company that is desperately trying to reduce its reliance on a deteriorating PC market and remake itself as an enterprise IT solutions and services provider.
The proxy organization also suggested that the counterproposal put forward by activist investor Carl Icahn and Southeastern Asset Management (SAM)—to buy up to 1.1 billion shares for $14 a piece and vote in a new board of directors, all while keeping the company public—would be a more risky and complicated process.
“In the end, shareholders must weigh the bullish enthusiasm of Icahn, SAM, and several other shareholders who have publicly declared the offer price too low against the apparently increasing headwinds in Dell’s transformation process, and the signals transmitted by the lower trading prices and analyst price targets immediately prior to any takeover speculation,” ISS said in its report. “Given the 25.5% premium to the unaffected share price, the certainty of value provided by the all-cash consideration, and the fact that the transaction would transfer to the buyout group the risk of the deteriorating PC business and the company’s on-going business transformation, a vote FOR the transaction is warranted.”
Dell’s special committee issued a statement lauding the ISS’ recommendation, noting that given the increasing competition and downward PC trends, the $13.65-per-share offer is a good one. “We also believe rejection of this transaction would expose Dell and its shareholders to serious risks and uncertainties that will harm the Company’s business and erode shareholder value,” the committee said.
Michael Dell has argued that taking his embattled company private—and removing it from the glare of Wall Street—is the best way to accelerate Dell’s transformation and get it back on stable financial footing. The company for the past few years has spent billions of dollars buying dozens of companies to build its capabilities in everything from networking and storage to cloud and software.
Michael Dell Gets Backing of ISS in $24.4 Billion Bid to Buy Company
ISS in its recommendation pointed to the strategy as a strong one, and said it believes Dell executives have done a good job with the transformation.
“Given that a business transformation in this industry, which is continuing to transform itself, will likely have a moving target, speed of transformation is especially crucial for success,” the group said. “The board, too, argues that the market has ignored Dell’s progress to this point, highlighting that as non-PC revenue has grown, overall trading multiples have contracted. Shareholders must consider, however, that despite recent trading levels—attributed to the PC business declining faster than anticipated—Dell’s acquisitions are exceeding management’s expectations. Despite poor PC fundamentals, in other words, ‘New Dell’ is still on track.”
Icahn has argued that Michael Dell’s proposal would benefit him and Silver Lake at the expense of shareholders, and that if the company turns around, he will benefit, not the shareholders who have been with the company for years.
ISS saw it a slightly different way. It’s more about Michael Dell and Silver Lake—rather than investors—assuming the risk involved in the company’s transformation.
“The risk may be less that he’s taking all the upside for himself than that he is trying to catch a falling knife,” ISS said in the recommendation. “From a public company shareholder’s perspective, if your CEO is willing to buy your falling knife for the privilege of catching it, there is probably a price at which you should let him.”
Some analysts agree. Roger Kay, principal analyst with Endpoint Technologies Associates, wrote in a column in Forbes that what Michael Dell is trying to do is not easy.
“Despite what Carl Icahn says, there’s no quick fix here,” Kay wrote in a column published before ISS’ recommendation was released. “The only thing Michael Dell is promising management, employees, and partners like Microsoft and Intel is a lot of hard work over a period that could easily stretch to five years or longer as he attempts to transform the company from a commodity PC supplier into an enterprise solutions provider, a difficult job with an outcome that is by no means certain.”
He also had harsh words for Icahn and his partners, saying that Icahn and “his vulture capitalists are waiting in the wings, hoping the deal fails, which would create an opening for what would surely be the dismantling of Dell as a viable operating company.”