Monday, March 11, 2013

Dell - Icahn: March Madness!

I have expressed fairness concerns about the proposed Dell insider LBO. See the February 8, 2013 post “The dell LBO: Existing Shareholders Lookout Below”. Until recently, it appeared that despite the resistance of minority shareholders like Southeastern, the deal would proceed at the original $13.65 per share offer price. Quite simply, no other bidder could or would challenge the Michael Dell-Silver Lake sponsored deal, which Dell’s board had blessed as the best alternative. Luckily for the minority shareholders, not so lucky for Mr. Dell, et al, Carl Ichan has entered the fray. He is proposing a special $9 per share shareholder distribution funded via use of excess cash and debt. He believes the this combined with the remaining “stub” value of $13.80 per shares offers a better value for all shareholders-not just Michael Dell-Silver Lake.

The nub of the issue is related party LBOs is always prone to abuse. The proposed Dell deal is especially suspect given its large cash position. Undoubtedly, as 4Q12 results indicate, Dell’s legacy PC business continues to decline. Nonetheless, it remains cash positive and has large liquid resources. The offer price, although representing a substantial premium over the pre-offer trading price, is at a large discount to Dell’s 52 week high price-a usual selling shareholder reference point. Furthermore, based publicly available information, a higher fundamentals based price could be reasonably crafted. Dell’s share price has increased following the mounting pressure by about $1 per share as investors sense that the offer price needs to raise to avoid Ichan’s ‘years of litigation’ threat.

Some lessons I see from this unfolding sequence of events are as follows:

1)     Honesty is still the best policy: The Dell “short sighted market doesn’t understand” the reason for going private which was never very convincing. Trying to complete a turnaround in a highly leveraged LBO structure would complicate not simplify the prospects. The real reason was to capture the upside benefits for the buyout group-in particular the large net $7.4B available cash position. Interestingly, the Dell group plans to bring the foreign cash home and pay the tax penalties after years of saying it could or would not return the cash due to tax considerations.

2)     Sharing is nice: Consider sharing the upside with Dell’s long suffering shareholders rather than trying to keep it all. A special shareholder distribution involving utilization of available net cash and a debt financed share repurchase would have allowed shareholders to participate in the transaction. Also, it could have avoided the auction requirements in a going private transaction. I would love to see the Board’s analysis in rejecting this alternative.

3)     Don’t be a pig: Absent sharing, at least offer a price that does not embarrass existing shareholders like Southeastern who has a $15-16 investment basis. Let them walk away- if not happy –at least not mad.

4)     Over disclose to increase the trust level: Provide valuation information to an independent third party like The Shareholder Forum, Inc with appropriate confidentially safeguards. This would supplement the less independent traditional fairness opinion provided by the company hired investment bank.

5)     The Michael Dell Rule: When he is buying you should not be selling. He does not appear to be minority shareholder friendly.

Ultimately, the next steps in the drama include Dell dropping the deal, increasing the price, providing more information, or letting the shareholders share in the deal. God bless Carl Ichan-he is doing God’s work here-of course for a fee, but that is ok.

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