Is Carl Icahn a Glutton for Punishment?

Since Michael Dell announced his intention to take private the company he founded three decades ago in his dorm room, Carl Icahn has been one of the biggest thorns in his side. Michael Dell argues that going private will give Dell (UNKNOWN: DELL.DL  ) the best chance to successfully reinvent itself as a provider of enterprise hardware, software, and services, and he has therefore partnered with private-equity shop Silver Lake Partners to offer $13.65 per share for the company.

By contrast, Icahn contends that $13.65 undervalues the company. Moreover, he believes that Dell can execute its turnaround plan as a public company. Icahn put forward yet another alternative last week. Under Icahn Enterprises' (NASDAQ: IEP  ) most recent proposal, Dell would run a $14 tender offer so dissatisfied investors can exit. This would give remaining shareholders a larger stake in the company.

Icahn's most recent offer may be his best yet. However, he has lost a lot of credibility as he has continuously proposed, refined, and then scrapped various alternatives to the Dell-Silver Lake buyout offer over the past four months. Moreover, Icahn's biggest supporter, Southeastern Asset Management, sold half of its Dell holdings to Icahn last week, suggesting that it's looking to cut its losses. When Dell shareholders vote on the buyout proposal next month, they will most likely put Icahn out of his misery, sending him off to his next project.

Revolving door
In March, Icahn initially offered to buy 58% of Dell's stock for $15 a share. Around the same time, Icahn also suggested that Dell should pay its shareholders a special dividend of $9 a share. Neither of those ideas went anywhere, but Icahn eventually came back with a more firm plan under which Dell would pay a special dividend of $12, but shareholders would have the option of receiving extra shares instead of the cash payment.

This leveraged recapitalization plan piqued the interest of many shareholders, but Dell's board was skeptical about the math. Not only had Icahn not lined up firm financing commitments, but the board also believed that his plan didn't leave Dell with adequate liquidity.

Another new plan
Believing that the odds were stacked against his leveraged recapitalization plan, Icahn withdrew it and substituted the recent tender offer proposal instead. The new offer makes a good deal of sense if you think Dell is just going through a rough patch today. Shareholders who want to exit can get $14 (slightly more than the $13.65 being offered by Michael Dell and Silver Lake), and those who want to stay will see the diluted share count drop from 1.8 billion to around 700 million. Moreover, it appears that Icahn may have finally lined up sufficient financing for the proposal.

However, Dell's struggles aren't just transitory. Not only does the company still rely heavily on selling PCs and related services to drive EPS and cash flow, but Dell's newer enterprise-services business is a small player in a highly competitive space dominated by the likes of IBM, Hewlett-Packard, and Cisco Systems. While Dell might successfully elbow its way into this business, it could just as easily see its investments come to naught.

Michael Dell outlined these risks in a recent presentation to shareholders. He believes that the company has a better shot of successfully transforming itself outside the market's scrutiny. There is something to be said for this theory; plummeting earnings (a likely phase in the eventual transformation) could lead to speculation about strategy changes, causing customer uncertainty that further pressures earnings.

End of the road
Not surprisingly, Dell's board doesn't like Icahn's latest plan much more than the previous ones. The special committee is probably tired of dealing with Icahn's constantly shifting plans, and the amount of cash actually available at Dell is still in dispute. This tender offer will probably be Icahn's last proposal, as shareholders will vote on the buyout proposal in the middle of July.

Icahn's most recent plan will probably appeal to many shareholders. If it were implemented successfully, shareholders who want to exit would get more than $13.65 a share, and shareholders who believe in Dell's future could significantly increase their ownership share of the company. Yet Icahn's inability or unwillingness to submit a firm proposal and stick to it has undermined his credibility with shareholders. With two polarizing figures -- Michael Dell and Carl Icahn -- battling for control of the company, it will be very interesting to see the proxy vote totals come in next month.

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