Dell profit slides 72 percent as privatisation battle drags on

Dell reported a 72 percent drop in profit on Thursday, a month before an expected shareholder vote that could shape the future of the company.

Dell is in the midst of a battle between founder and CEO Michael Dell, who wants to take Dell private, and a group of discontented shareholders who say he must pay more money in order to do so.

Michael Dell and his investment partner increased their offer slightly last month, to about US$24.7 billion, and on Sept. 12 Dell's shareholders are due to vote on whether to accept the proposal. The opponents, led by investor Carl Icahn, still want more money, and it's unclear if the privatization plan will go through.

In the meantime, Dell is fighting to improve its financial performance against the backdrop of a declining PC market, a lackluster economy and uncertainty about its future.



On Thursday it reported revenue for its second quarter, ended Aug. 2, of $14.5 billion, about level with the same quarter last year. Net income declined 72 percent to $204 million.

Sales in its PC business fell 5 percent to $9.1 billion, Dell said. But operating profits from that group declined more steeply, by 71 percent, as Dell cut prices to win business and grow its market share.

"Our efforts to improve growth have improved our share position at the expense of profitability," CFO Brian Gladden said in a letter to investors.

Results were better in its Enterprise Solutions Group, which sells servers, storage and network gear, where revenue was up 8 percent to $3.3 billion, Dell said. Services revenue was also up slightly, to $2.1 billion.

Using nonstandard accounting methods, which excludes certain costs and charges, Dell reported a profit of $433 million for the quarter, or $0.25 per share. On that basis, profits were in line with analysts' expectations, according to Thomson Reuters.

Dell's expenses in the quarter also included $125 million related to the privatization effort, the integration of acquisitions and layoffs, the company said.

Dell released the results a few days ahead of schedule, because of the "heightened interest in the company," spokesman David Frink said. It opted to forgo the usual conference call with financial analysts, publishing instead a letter from its CFO and other materials.

Michael Dell announced his plan to take Dell private back in February. He's trying to grow the data center side of Dell's business, which is more profitable than the PC side, and says he can do it more effectively if Dell is private, away from the scrutiny of Wall Street.

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.

How a Typical Patent Battle Took an Unexpected Turn

I posed this question to the man with the notoriety, Erich Spangenberg, who runs IPNav, asking if he had any words of advice for a Chicago entrepreneur named Peter Braxton. Mr. Braxton, a former Air Force pilot, was in desperate shape when we first spoke about a month ago — so desperate that he was borrowing money from his mother and brother for living expenses. To understand how he got there, and to set up what turned out to be a rather surprising conversation with Mr. Spangenberg, let’s rewind Mr. Braxton’s story.

Three years ago, Mr. Braxton was stuck with about 200 people, waiting to get into a nightclub at the Encore Hotel in Las Vegas. A few days later, he conceived an app called Jump Rope. It would give users the opportunity to pay some fee to get to the front of a line — at a club, a restaurant, a museum or any place where a premium for entry could be charged.

Mr. Braxton, who at the time worked at Credit Suisse in Chicago, raised about $250,000 from friends and family to make his idea come to life, with more promised as the company grew. He hired code writers and two employees.

The app started in November 2011. In December, Mr. Braxton received a phone call from Geoff Baker, a lawyer for a company, also based in Chicago, called Smart Options.

“He said, ‘We have reason to believe you’re infringing on our patent, and we’d like to find a reasonable solution that involves some kind of license agreement,’ ” Mr. Braxton recalled. “I said, ‘Slow down.’ ”

Mr. Braxton hired a lawyer, who told him that Jump Rope did not infringe what is officially known as Patent No. 7,313,539, a k a a “method and system for reserving future purchases of goods or services.” When Mr. Braxton declined to pay a license fee, and rebuffed a variety of other arrangements, Smart Options sued.

Mr. Braxton returned all the money he’d raised — “Nobody wants to buy a lawsuit,” he explained — and paid for the case out of his own pocket. The ensuing dispute, by the standards of patent brawls, was brief and lopsided. Judge Amy J. St. Eve of Federal District Court in the Northern District of Illinois found for Jump Rope on summary judgment, which is another way of saying that the judge didn’t think the matter even worthy of a trial.

Judge St. Eve also ordered Smart Options to pay Jump Rope’s legal fees. She called the lawsuit “frivolous.”

This might have seemed like an obvious moment for Smart Options to cease hostilities. Instead, it reloaded. In addition to filing an appeal, in May, Mr. Braxton says Mr. Baker told him that Smart Options would sue Jump Rope using a different patent in its portfolio.

Mr. Baker, in an interview, said the judge got it wrong.

LAST month, when Mr. Braxton told me about his predicament by telephone, he sounded cornered. He was out of money, so he couldn’t afford to fight an appeal. At 35, Mr. Braxton was considering a return to the military, as a reservist. (He had already served in both Iraq and Afghanistan.)

“I have about the same amount of money in my bank account as I did when I was 15 years old,” he said in June. “I’m practically bankrupt. If you’re a start-up, you have no chance with this kind of litigation.”

What should he do? I asked Mr. Spangenberg if he would be willing to share ideas. I hoped only that the conversation would yield intriguing fodder for a profile of Mr. Spangenberg.

That night, Mr. Spangenberg read the rulings in the case and he decided that he liked what he saw. Loved it, in fact. So much, that by the time he and Mr. Braxton were chatting the next day, via speakerphone, he wanted to make a deal.

“If we came in and helped you on this, would you start your business back up?” he asked.

“One hundred million percent yes,” Mr. Braxton said.

'The Butler' Battle: Director Lee Daniels Pleads His Case To Warner Bros.' Kevin Tsujihara

Further ratcheting up the Weinstein Company’s campaign to force Warner Bros. into granting it permission to call its upcoming Lee Daniels’ film The Butler, the director has sent a letter to Warner Bros. Entertainment’s new CEO Kevin Tsujihara in which Daniels argues that if TWC has to change the movie’s title “it will most certainly hurt the film.”

On Tuesday following an arbitration, the MPAA’s Title Registry Bureau ruled that TWC could not use the title because it’s also the name of a pre-existing 1916 short film that now resides in the Warner Bros. library.

In response, attorney David Boies, who is representing TWC in the dispute, fired off letters to the MPAA and Warners earlier Wednesday threatening litigation.

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Daniels’ letter takes a different tack, pleading his case by describing the film, which stars Forest Whitaker and is based on the true story of Eugene Allen, who spent 34 years working at the White House until he retired as head butler, as a film he made “so I could show my kids, my family and my country some of the injustices and victories African-Americans and their families have experienced in the fight for Civil Rights.” The movie, he continued, “tells the story of the Civil Rights Movement from the sit-ins and the Freedom Riders, to Selma, Martin Luther King’s assassination and the election of the first Black president.”

Daniels wrote that while working on the film “is the proudest moment of my professional career, I am heartbroken as I write this letter.” He explained that the modestly budgeted movie is not intended to be a blockbuster and “if we were to change the title a mere six weeks before we open, it would most certainly hurt the film by limiting the number of people who would ultimately see this important story.”

Offering to screen the movie for Tsujihara, Daniels said, “I truly believe that once you watch it, you would not want to cause this film any harm.”

Daniels concluded the letter by adding he has the support of its stars Whitaker, Oprah Winfrey, Cuba Gooding, Jr., and David Oyelowo as well as screenwriter Danny Strong. Copies also were sent to Warners executives Sue Kroll, Greg Silverman and Dan Fellman.

'The Butler' Battle Escalates: Weinstein Co. Hints Lawsuit, Raises Antitrust Warning

An image from Lee Daniels' 'The Butler'
The battle over whether Harvey Weinstein can call Lee Daniels' upcoming White House movie The Butler escalated Wednesday as the Weinstein Company's superstar attorney David Boies fired off letters to Warner Bros and the MPAA threatening litigation.

In an arbitration, the MPAA's Title Registry Bureau ruled Tuesday that TWC could not use the title, because it's also the name of a preexisting 1916 short film that now resides in the Warner Bros. library.

As a signatory to the MPAA's Title Registration Bureau, Weinstein is bound by the arbitrator's ruling. The movie mogul might not like the fact that an arbitrator gave Warners the rights to The Butler, but judges are loath to do anything but confirm arbitration awards.

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With the success of an appeal looking unlikely, and with TWC facing $25,000 worth of daily fines if it continues to advertise the film as The Butler, Boies is now speaking about a lawsuit. Possible claims could include extortion, misrepresentation and antitrust violations.

The letter to Warner Bros' general counsel hints at some of the discussions that preceded the title dispute.

"I am informed that Warner Bros. represented to, and agreed with, TWC that TWC would be permitted without objection by Warner Bros. to use the title “The Butler” in return for certain contributions that TWC agreed to make," writes Boies.

According to TWC COO David Glasser, "We had the title of The Butler and we had spoken with Warners along the way. Our head of distribution and their head of distribution had an agreement. But then we became involved with another piece of business with Warners, and suddenly we were told there was a conflict, and so we went to arbitration." He would not comment on what other business dealings had been taking place.

Other sources paint a different picture, claiming that TWC began using the title in September, 2012 and attempted to register it with the MPAA in November, but the request was declined. Annoyed that TWC was moving forward with the title without the necessary clearances, Warners told TWC it couldn't use the title in March and then sent a cease-and-desist letter in June, all of which led to the arbitration. As for the suggestion that an earlier agreement had been reached, one sources familiar with the dispute says, "There was no deal. That is false."

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In his letter, Boies continues, "I am further informed that after TWC had relied on these representations and agreement, Warner Bros. repudiated those representations and agreement and sought, in concert with the MPAA, to prevent TWC from using its title."

Asked whether in order to resolve the matter quickly, TWC would consider renaming the film, which stars Forest Whitaker and is based on the true story of Eugene Allen, who spent 34 years working at the White House, Glasser said, "I have Lee Daniels' The Butler registered. I have The White House Butler registered. But what is so insane is that we've been told we can not use any version of the worlds 'the butler.' That part blows our minds."

Boies' second letter to the MPAA is even more direct about the potential antitrust claims.

"To the extent that the MPAA in concert with its members seeks to 'permanently protect' titles where there is no plausible claim of possible confusion, and no claim of actual damages, such an attempt would be a naked restraint on trade in violation of the anti-trust laws," writes Boies.

The MPAA did not immediately respond to requests for comment. Of course, the MPAA's arbitration system doesn't use the same standards set up in trademark law to measure the likelihood of consumer confusion about the source of a mark. If it did, the outcome might have ended up differently. Now the question is whether The Weinstein Co. can allege with specificity enough funny business before the initiation of the arbitration claim.

In the meantime, the two companies are locked into a public relations stand-off. Warner Bros. risks looking as if its playing the spoiler, while Weinstein runs the risk of looking like the same man who has repeatedly cried foul over movie ratings.

Gay Marriage Battle Shifts To States

Advocates for gay marriage in New Jersey gather outside the Statehouse on Thursday.

Gay rights activists celebrated two big victories this week before the U.S. Supreme Court, as justices overturned the Defense of Marriage Act and cleared the way for same-sex marriages in California.

Now gay marriage opponents and supporters are turning their attention to individual states, like New Jersey, where polls show most residents support same-sex marriage. So far, one person, Gov. Christ Christie, has stood in the way.

"I believe that the institution of marriage for 2,000 years has been between a man and a woman, and I believe that it should continue to be," Christie said recently on a radio call-in show in Trenton last week.

Heading into a re-election campaign, Christie remains popular, even though most voters in the state disagree with him on this issue. He says advocates should put the issue before voters in November with a referendum.

"The proponents have said all along that the majority of people in New Jersey want it," he told radio listeners. "Well then put it on the ballot and then it'll pass and then it's the end of the discussion."

Privately some gay marriage supporters say they want to avoid an expensive campaign. But more important, they say a referendum is not how they want to win.

Sheila Oliver, speaker of the New Jersey General Assembly, says guaranteeing civil rights should be the role of courts and lawmakers. Last year New Jersey's legislature approved a gay marriage bill, but Christie vetoed it.

"Many of our legislative leaders believe that civil rights should not be litigated in a public referendum," Oliver said. "I think the next tactic you will see in the next coming weeks in New Jersey are efforts to get a veto override."

Hayley Gorenberg, an attorney with Lamda Legal, said at a rally Thursday that there's a clear legal argument now to establish same-sex marriages in the Garden State. New Jersey already has civil unions, but gay rights groups want full marriage.

"Based on the Supreme Court decision, we will file a motion for summary judgment for an immediate ruling that same-sex couples be allowed to marry," Gorenberg told supporters.

In neighboring Pennsylvania, several Democratic lawmakers are introducing same-sex marriage legislation. But those bills will likely have an uphill battle in the Republican-dominated legislature.

On Wednesday, Democratic State Rep. Brian Sims, who is gay, tried to make a statement on the House floor, but Republicans blocked him.

Speaking on member station WHYY, GOP State Rep. Daryl Metcalfe said he felt
obliged to stop Sims from making comments "that ultimately were just open rebellion against what the word of God has said, what God has said, and just open rebellion against God's law."

Most states in the U.S. don't allow same-sex marriages. But now, with California, about 30 percent of the U.S. population will live in states that do have gay marriage. Supporters believe the list of states will grow.

Illinois Gov. Pat Quinn says he hopes his state will soon make gay marriage legal. There's talk of campaigns and legal battles in places like Hawaii, Nevada, Oregon and Ohio.

Colorado allows civil unions, but University of Denver law professor Kris Miccio says she wants full marriage. She believes the Supreme Court's rulings last week give her a good argument to make in court. So she and her partner have a plan.

"We're going to be married the Saturday after Thanksgiving in New York," Miccio said. "And then coming back to Colorado and filing suit."

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