The Dell Inc. buyout saga got very serious on Friday, when reports surfaced that Michael Dell and Silver Lake Partners won’t raise their $24.4 billion bid for the company, which amounts to $13.65 a share.
That stance, investment professionals said, could spell a shareholder defeat for the buyout offer when shares are counted July 18 in Round Rock.
Both the Bloomberg and Reuters news services, cited unnamed sources, when they reported Friday that the Dell CEO and Silver Lake have decided not to raise their offer for the company.
Billionaire investor activist Carl Icahn has urged investors to vote down the Michael Dell buyout, saying it undervalued the company. If the buyout is voted down and if Icahn can win some backing on the company’s board, he proposes to offer $14 a share for 72 percent of the company’s stock.
The situation, analysts said, adds to the uncertainty surrounding the company
“Michael won’t raise the bid,” said analyst Roger Kay with Endpoint Technologies Associates. “If shareholders have their heads screwed on right, they have to take the deal. If they don’t, the stock is going to fall to about $7. They will lose big.”
The special committee to Dell’s board of directors made the same point.
In a filing with the Securities & Exchange Commission, the special committee warned of a “substantial downside risk to Dell shareholders if (the) transaction is invested.”
After that filing, Dell Inc. shares declined by 28 cents, or 2.1 percent, to close at $13.03 a share in very heavy trading.
Last weekend members of the special committee had recommended to Michael Dell that he raise his offer price or risk the defeat of the plan by shareholders, according to a source familiar with the matter. The CEO listened to the recommendation, but was noncommittal on what course of action he would take.
The next step in the process is the expected report next week by an advisory firm, Institutional Shareholder Services, on the whether institutional shareholders should approve the buyout offer. ISS is leaning against the deal, according to people familiar with the matter.
If ISS recommends against approving the deal, that increases the odds that the buyout bid will fail, analysts said.
“Many of the institutional investors will vote down the deal and we are going to have a major mess on our hands here,” said industry analyst Patrick Moorhead with Moor Insights & Strategy.
Michael Dell has already said that he will stay with the company and work to help it even if his buyout bid fails. He would remain as the largest shareholder and probably would remain as CEO so long as he keeps the support of his board.
But Icahn has said he will support his own slate of directors for the company.
Moorhead said he believes that Icahn really doesn’t want to wind up in control of the computer maker.
“He doesn’t want to run this company, but he would like to take it to the very edge where he can make some extra dollars,” Moorhead said. “It is kind of a Wall Street shakedown.”
“Icahn would prefer not to run Dell,” Kay said. “He is not an operating manager. He is a greenmail specialist. His idea is to jam management and make some money.”
If investors think that Dell Inc. can be quickly turned around in weak PC sales environment, they are mistaken, analysts said.
“There is no magic bullet,” Kay said. “Michael is not saying there is a quick fix. He is promising a lot of hard work and suffering over the next five years or longer to complete the transformation” of the company.
In its filing Friday, the special committee described Icahn’s valuation for the company as “unrealistic.”
It noted that “two-thirds of Dell Inc.’s revenue is driven by PCs” and said company “cash flow that has fueled (recent) enterprise acquisitions is deteriorating.”
It also said that much work is left to be done to complete Dell’s transformation into a company that is primarily focused on selling hardware, software and services to enterprise customers. That remaining work ahead is “risky, expensive and a multi-year process.”
“As the (industry) environment continues to evolve rapidly, additional investments and acquisitions are likely to be required to complete the transformation.”
Icahn told the Wall Street Journal on Friday that he believed the buyout group is being misleading about the health of the company and about its own intentions.
“I’m tired of their propaganda,” he said. “If they’re going to go away, let them go away.”