Iceberg Ahead for Dell Shareholders

As each week goes by, the situation at Dell (UNKNOWN: DELL.DL  ) looks more and more like a repeat of the Titanic. There's an iceberg ahead, but nobody seems capable of doing anything about it. As Michael Dell and Carl Icahn struggle for control of this once-great company, ordinary shareholders' interests are increasingly being left by the wayside. As a result, Dell stock has been slowly losing altitude.

DELL Chart

DELL Six-Month Price Chart. Data by YCharts.

It would be wrong to say there's no hope of a successful buyout. The original offer made by Michael Dell and Silver Lake -- to buy the company for $13.65 a share -- is still on the table. Moreover, the two parties have offered to raise their bid to $13.75 per share, if the special committee overseeing the proposed transaction agrees to change the voting rules to exclude non-votes, rather than counting them as "no" votes.

Unfortunately, the original proposal does not seem to have enough shareholder support to go through, while the revised proposal is unlikely to make it to a vote, as the special committee is worried that it will seem unfair to change the rules. Yet the "fair" result is likely to be the worst one for shareholders: a stalemate that prevents any "value-unlocking" activity and leads to a big decline in Dell stock.

Last-minute maneuvers
Earlier this month, shareholders were supposed to vote on the original $13.65 buyout proposal from Michael Dell and Silver Lake. However, with shareholders split roughly 50/50 for and against the transaction, Dell and Silver Lake realized that the buyout proposal was likely to fail. The problem was language in the original agreement that counted non-votes as votes against the buyout proposal.

As a result, Dell and Silver Lake offered to raise their bid from their previous "best and final offer" of $13.65 to $13.75, as long as the special committee overseeing the process agrees to change the voting rules so that non-votes are excluded (i.e., counted as abstentions). Both the price increase and the proposed rule change were intended to smooth the way for Dell to go private. The vote was then rescheduled for this Friday.

Not surprisingly, Carl Icahn of Icahn Enterprises (NASDAQ: IEP  ) and his supporters -- who have vehemently opposed the Dell buyout for months -- are loudly protesting the proposed rule change. (After all, it would presumably end their hopes of gaining control of Dell.) Pressure from shareholders who oppose the buyout will make it difficult or impossible for the Dell special committee to change the voting rules, even if it would make sense to do so.

Plenty of downside
While Icahn and his group believe that Dell could increase shareholder value by changing Dell's capital structure, it's hard to imagine a scenario where Icahn would be able to carry out those plans. Michael Dell has no intention of leaving the company if the go-private transaction fails.

Moreover, while Icahn's group may have enough votes to sink the go-private transaction, it is highly unlikely that they have enough votes to take control of the board. Michael Dell cannot vote on the go-private deal because of his conflict of interest, but if the deal falls through, his 16% ownership stake in the company will come back into play. Since he will certainly vote against Icahn's proposed board, Icahn will have to get far more than 50% of the "unaffiliated" stockholders to support his proposal. Given that the vote totals have reportedly been very close to 50-50 so far, Icahn seems certain to fall short.

Unfortunately, that would leave Dell in "status quo" mode. With analysts expecting adjusted EPS to plummet to $1 this year (from $1.72 last year) due to PC market weakness and margin compression, the status quo is not something Dell shareholders should look forward to. The Dell special committee estimated early this month that Dell's stock could trade between $5.85 and $8.67 if the buyout fails.

Bad situation
Dell shareholders have no good options right now. The ongoing battle between Carl Icahn and Michael Dell is turning ordinary investors into collateral damage. Neither Icahn nor Dell appears to have enough votes to enact their preferred scenario. However, both sides have dug in and so neither is likely to give up and sell to the other. Right now, Dell (the company) needs leadership and stability, yet the proxy battle is causing chaos. At the end of the day, Dell's competitors are likely to be the only ones who are happy.

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  • Report this Comment On July 29, 2013, at 11:13 PM, Klippenstein wrote:

    This is a very limp analysis. $13.65 or $13.75 undervalues the company significantly. When I first bought it at $9.50, I calculated it was worth at least twice as much due mainly to net cash. Dell wants to rob shareholders (may I remind you, shareholders are the real owners and M. Dell only owns some 16 or 17% ... other shareholders own 82 or 83%. Dell is currently managing the company into the ground to get it cheap. Once bought out, the real owners have no further benefit from Dell's success. If he were noble, he would work to turn the company around for ALL owners (including himself). He is demonstrating hubris and greed. Hence Carl Icahn is taking him to task. It is doubtful that all the fight in the world could do worse for shareholders over the longer run, then M. Dell is proposing to do. There is still a lot of value left to piss away. If Icahn has his way, Dell will be turned around and run for shareholders: you and me! That is worth fighting for. M. Dell deserves to lose control of this company. The sooner the better for everyone else involved, maybe even for M. Dell himself. Look closely and you will see that he has long played a zero sum game. Run right, Dell could build wealth for us all. THIS is Carl Icahns mission. If you are smart, you will support him. If not, sell your shares tomorrow and you will hardly do worst than Dell's paltry bid.

  • Report this Comment On July 30, 2013, at 10:14 AM, TMFGemHunter wrote:

    @Klippenstein: You're entitled to your opinion. But don't think that Carl Icahn cares anything about Dell the company or the shareholders. He's just looking to make a quick buck by stirring up trouble. If it goes south, he still has billions of dollars of wealth to fall back on.

    Dell's net cash position isn't that big anymore: about $3.50/share. So the buyout price is a little more than 10X FY14 estimated earnings plus net cash. It's true that Dell's earnings are artificially low this year because of investments being made to grow in software/services. But there's no guarantee those investments will ever pay off. Dell is entering ultra-competitive markets where other big-name firms have much more experience, R&D capability, etc.

    In other words, I think the buyout price is a great deal for shareholders. You're giving up a little bit of upside to avoid 50% downside.

    Adam

  • Report this Comment On July 30, 2013, at 10:53 AM, nofoolingforme wrote:

    Oh come on, Adam! Klippenstein is absolutely correct. Michael Dell has been playing the shareholders for patsies. He has done everything to decrease the share value so that he can steal it out from under them. HP was on the ropes a few months back because of declining desk top computer sales. Now their shareprice is approaching $30. Dell share would be well over $20 if not for Mikey's ridiculous antics and low-ball offer which has been holding it hostage.

    Yeah right, Dell and Silver Lake are such nice guys they are willing to buy the company and bail us poor shareholders out- ha ha ha. Raising the share price offer by a measly 0.77 percent is supposed to make me jump at the chance. They want the company for a reason and it isn't so Michael can save us or his family namesake from doom. The board doesn't need to buy us out in order to make this company a great one once again. They already spent a ton of shareholders money buying into the cloud and they have a very solid strategy or they would not be wanting to take it over. They started paying a dividend recently cos they have money and are capable of making much more.

    If and when the deal falls through, the share price will plummet for sure, however, that will be a good time to buy more shares. In five years time, Dell will be touted as the "corporate turnaround miracle" of the decade. That is because it has been manipulated to look so bad by Mikey and company, when, in fact, it is capable of alot more than what they let on.

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