Wall Street Beat: Icahn battle with Dell over buyout going down to the wire

With a shareholder vote scheduled for July 18, the battle over Dell’s $24.4 billion plan to go private intensified Friday as investor Carl Icahn and his affiliates issued an enhanced offer for the company.

Icahn and his partner, Southeastern Asset Management, issued a letter to Dell shareholders offering a warrant to buy a share in the company at $20 over the next seven years for every four shares that they sell now. Icahn’s plan calls for part of the company to continue to be publicly traded.

The new offer is in addition to the previous proposal to buy shares at $14 each. Making the calculation that shares will rise over $20 once the suggested proposal and new management is in place, Icahn said in the letter that the entire deal is potentially worth $15.50 to $18 a share for current shareholders.

In the letter, Icahn said that he and Southeastern are “completely committed to bringing in management that we expect to be far superior to Michael Dell who we believe has had an abysmal record during the last three years. We believe there would be several excellent candidates for this position who would be very interested in running this company once a clear mandate has been established.”

Michael Dell and his affiliates, Silver Lake Partners, are offering $13.65 in cash per share. Dell is betting that as a private company, free from the pressure of Wall Street scrutiny, it will have more room to execute its strategy to push into high-margin products and services and move away from the floundering PC market.

For the buyout plan to go through, it needs to be approved by 50 percent of shareholders not including Michael Dell. This amounts to investors holding a total of 42 percent of the company.

With the shareholder vote looming, the battle over Dell’s future has ramped up recently.

Earlier this week, Icahn pressed shareholders to exercise appraisal rights on the company’s value. The appraisal would require a Delaware state judge to issue an opinion on the company’s worth. It could also derail the deal.

Dell responded to Icahn’s suggestion for the appraisal with a scathing statement of its own.

“Pursuing appraisal involves substantial risks and costs,” Dell said. “If a sufficiently large number of shareholders seek appraisal and thus do not vote in favor of the acquisition (which is required to pursue appraisal rights), the merger agreement will be terminated, the merger will not occur, stockholders will not have the opportunity to receive the $13.65 per share cash merger consideration, there will be no appraisal rights, and stockholders will continue to bear the risks of holding their Dell shares. “

In addition, Dell pointed out, there is no assurance that a judge would value the company greater than what Dell is offering.

There is also no assurance that any new management that Icahn brings in would perform better than Michael Dell.

Three shareholder advisory groups this week, including Institutional Shareholder Services, advised shareholders to vote for the Dell buyout plan. The plan assures shareholders of a definitive value for their holdings and eliminates risks associated with Icahn’s proposal, they said.

“ISS recommends clients vote FOR this transaction, which offers a 25.5% premium to the unaffected share price, provides certainty of value, and transfers the risk of the deteriorating PC business and the company’s on-going business transformation to the buyout group,” ISS said Monday.

The other advisory groups recommending the Dell plan were Egan-Jones Proxy Services and Glass, Lewis & Co.

Over the past month, reports have surfaced indicating that Silver Lake was getting second thoughts about the deal, as the PC market worsens. However, Dell officials said Friday the vote is set to go ahead as planned. Dell had no comment on Icahn’s new offer Friday.

Dell shares closed Friday at $13.32, down by $0.03 for the day, on a generally up day for the markets.

Carl Icahn raises bid for Dell

US billionaire Carl Icahn is expected to sweeten his offer for PC maker Dell in another attempt to defeat a $24.4bn buyout offer by company founder Michael Dell and private equity group Silver Lake.

For several months, he has been fighting Michael Dell’s efforts to get back control of the company and take it private. Icahn has come out in support of other big investors who think the company is worth more.

Michael Dell is believed to be planning to retool the struggling company as a maker of datacentre equipment and software for corporations.

Icahn told Bloomberg that he plans to augment his $14 offer with a warrant that shareholders could use to acquire additional stock, should Dell shares climb, in a bid to defeat the offer of just $13.65 a share from the group led by Michael Dell.

Earlier this week, Icahn wrote a letter to shareholders, urging them to get a court appraisal of what the company is really worth.

Shareholders are scheduled to vote on the offer led by Michael Dell on 18 July 2013.

Icahn wants judge to appraise Dell buyout offer

Billionaire US investor Carl Icahn says he will go to court to get a better price for his stake in the computer manufacturer Dell.

For several months, Carl Icahn has been fighting a $24.4bn buyout offer from a group led by the company’s founder Michael Dell.

In attempt to get back control of the company and take it private, Michael Dell has partnered with private equity group Silver Lake to offer shareholders $13.65 a share.

Michael Dell is seeking to regain majority control so he can pursue his plan to retool the struggling company as a maker of datacentre equipment and software for corporations.

But Icahn and Dell’s biggest shareholders are unhappy with the deal, which is well below their estimation of company’s value at $24 a share.

Having failed to put together a successful rival offer, Icahn now says he will ask a judge to assess whether the offer, supported by Dell’s board, represents a fair price.

He is urging other shareholders to demand a court appraisal too, according to the BBC.

Carl Icahn entered the fray over Dell's sale in support of the unhappy shareholders, at first teaming up with private-equity group Blackstone in March 2013.

But in April 2013, Blackstone withdrew because of concerns over an unprecedented drop in PC sales and Dell reduced its operating income projections for the year to $3bn, down from $3.7bn.

Icahn then teamed up with Southeastern Asset Management, offering to pay $12 a share in cash or stock and let investors hold on to equity in the computer maker.

In the latest appeal to other Dell investors, Icahn said in a letter: "We believe if you seek appraisal, you will receive more."

However, the appraisal process will take time, which will prolong the period shareholders will have to wait until they can offload their shares.

Shareholders are scheduled to vote on the offer led by Michael Dell on 18 July 2013.

DealBook: As Promised, Icahn Adds to His Bid for Dell

Mark Lennihan/Associated PressCarl C. Icahn, the activist investor, in 2007.
Carl C. Icahn lived up to his word on Friday, offering a sweetener to his alternative to a $24.4 billion leveraged buyout of Dell Inc. by adding a warrant to his stock buyback plan.

In a letter to Dell shareholders, Mr. Icahn and his partner, Southeastern Asset Management, proposed giving shareholders a warrant to buy a share in the struggling computer company at $20 apiece for every four shares that they tender. That’s in addition to buying back 1.1 billion shares at $14 each. The activist investor says the entire package is worth $15.50 to $18 a share.

The move is the latest gambit by Mr. Icahn to sway shareholders away from supporting a $13.65-a-share takeover bid by Michael S. Dell and the investment firm Silver Lake, an offer that he has criticized as too low. The increased jockeying for investors’ loyalties comes ahead of a vote scheduled for Thursday on Mr. Dell’s offer.

Earlier this week, Mr. Icahn urged Dell shareholders to seek so-called appraisal rights for their holdings, in case the leveraged buyout is approved. That would allow investors to potentially receive more — or less — for their stock, once a Delaware state judge delivers a pronouncement on the company’s worth.

To advisers to Mr. Dell and to a special committee of Dell’s board, it appeared to be a desperate move and an effort to force the would-be buyers into raising their bid. But in his letter on Friday, Mr. Icahn contended that he was not seeking merely a bump in price. Instead, he argued that his efforts were aimed at replacing Mr. Dell as chief executive and leading a turnaround of the company himself.

“We are completely committed to our proposal and believe that it is economically better for stockholders than the Michael Dell/Silver Lake freeze out transaction,” he wrote. “We are also completely committed to bringing in management that we expect to be far superior to Michael Dell who we believe has had an abysmal record during the last three years.”

Mr. Icahn again took exception to a report by Institutional Shareholder Services, the proxy advisory firm, recommending that investors vote for Mr. Dell’s offer. His argument: I.S.S., as the firm is known, assumed that the leveraged buyout would lead to be a speedy payout to shareholders, while the stock buyback plan was uncertain and could drag out.

The billionaire activist contended that he believed his proposal could close faster than the proposed takeover. But he neglected to mention that his plan requires the election of an entirely new board, something that Mr. Dell — who owns a 16 percent stake — is unlikely to support.

What if Carl Icahn wins Dell?

FORTUNE -- Carl Icahn yesterday laid out the details of his $5.2 billion in debt financing for Dell Inc. tender offer. Turns out Icahn himself had to put up a whopping $3.1 billion, after originally suggesting that he'd be good for $2 billion in a worst-case scenario. In other words, it was a tough sell.

So I wrote a post arguing that while Icahn hoped the debt commitments would strengthen his position, it actually made him look weaker. After all, if prospective lenders are saying no, why does Icahn think equity holders will be any different. Particularly given that the bondholders would have greater protections (and a quasi-termination fee for their troubles)? Moreover, there's a high likelihood that the stock is now largely in the hands of arbs who are content with the $13.65 per share price, and have no interest in a longer-term hold.

Then this morning came numerous media reports that Dell's (DELL) special committee has asked Michael Dell to raise his $13.65 per share price. Seems that informal surveys of existing shareholders have indicated the buyout vote is a toss-up, and there are strong hints that ISS will come out in opposition (something that may sway just enough shares to matter). And the special committee must be legitimately worried, given that it leaked its request as a way to put extra pressure on Michael Dell (albeit not on Silver Lake, which is stretched thread-thin as it is).

But don't be so sure that Michael Dell is going to play ball with the special committee on this. Let's assume, for a moment, that the buyout is voted down and that Icahn subsequently gets his board installed (something I still don't believe will happen). At that point, Michael Dell still has some options:
(1) He could tender most of his shares to Icahn, thus leaving him with around an 11% stake of the remaining float (and also diluting the payout for everyone else).(2) Michael Dell could tender none of his shares, thus leaving him with around a 41% ownership stake. If Dell struggles under Icahn's control, then Michael Dell would be in position to launch his own proxy fight and/or propose a new buyout offer (likely at a lower price than $13.65 per share). Or Icahn could succeed with Dell, thus buttressing Michael Dell's paper fortune.(3) Michael Dell could go for some sort of middle ground (partial tender), depending on what math he thinks works the best.
To be sure, there are serious risks to Michael Dell remaining a major part of an Icahn-owned Dell. For example, Icahn could sell certain business units before Michael can begin trying to regain control, thus scuttling his desires to do so. And there is the broader issue of weakening employee morale as corporate palace intrigue drags on.

But my basic point is that the upcoming shareholders vote isn't a zero sum game for either Michael Dell or Carl Icahn. In fact, it may turn them into uncomfortable partners.