News Column

Investors to Decide Dell's Direction

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On Thursday morning, the shareholders of Dell Inc. will help decide what the future might look like for the largest private employer in Central Texas.

They will vote their shares for or against the proposed $24.4 billion buyout of the company by founder and CEO Michael Dell and his financial ally, Silver Lake Partners of California.

If they get the approval from stockholders, Dell and Silver Lake plan to take the company private, work for several years to transform the business and make it less dependent on sales of personal computers. The goal is to make Dell Inc. a full-fledged information technology company that offers advanced hardware, software and services to large and mid-sized "enterprise" customers that include both businesses and government agencies. If shareholders vote yes on the buyout, Dell is expected to become a private company before the end of the year. If shareholders vote to reject the buyout, analysts expect to see a power struggle at the company between Michael Dell and the group of investors who oppose him.

The Austin area's economy has a clear stake in the vote's outcome.

Since getting its start in a University of Texas dorm room in 1984, Dell Inc. has grown into a global organization with more than 100,000 workers, including 14,000 in Central Texas. The company has said that, if the buyout is approved, it would continue to make investments that would result in more jobs worldwide, including in Central Texas.

The biggest remaining obstacle to Michael Dell's plan appears to be Carl Icahn, the 77-year-old New York billionaire who is often characterized as either an activist investor or a corporate raider. Much of Icahn's estimated fortune of $20 billion has been tied to his ability to exert pressure on managements of public companies and prod them to take steps, including asset sales and spin-offs, that lead to quick investor profits. In the case of Dell, Icahn hasn't made a formal offer for the company that shareholders can vote on. But he is urging shareholders to vote no on the management buyout with the idea that he will be able to present his alternative plan at a later date.

Icahn and his largest investor ally, Memphis-based Southeastern Asset Management Inc., together own about 12.5 percent of Dell Inc.'s stock, making them the largest outside investors at Dell. Michael Dell and a group of Dell senior managers together own or control nearly 16 percent of the stock. But, under the terms laid out, the Michael Dell and management insider shares won't be counted in the vote on the buyout.

The Institutional Shareholder Services investment advisory firm summed the situation up this way: "Shareholders must weigh the bullish enthusiasm of Icahn ... and several other shareholders who have publicly declared the offer price too low against the apparently increasing headwinds in Dell's transformation process."

The possibility of taking Dell Inc. private was raised in June 2012, when Southeastern Asset Management -- one of Dell Inc.'s largest shareholders -- approached Michael Dell with the idea. After a variety of twists, turns and false starts, Michael Dell and Silver Lake submitted their formal offer in February for $13.65 a share.

A special committee of Dell Inc.'s board insisted on a "go-shop" period after the buyout offer to see whether an alternative deal could be found that would offer a better price to investors.

Icahn was one of two potential investors for the company to surface. The other during that period was the Blackstone Group of New York, which negotiated with Dell Inc. officials for several weeks before bowing out of the process in late April. Blackstone said it was spooked by rapidly falling shipments of personal computers early this year.

That left Icahn, who has proposed three potential investment offers for the company since March. The latest Icahn proposal calls for offering $14 a share for 72 percent of the company's stock. The money for the proposed deal would come from $5.2 billion in borrowing with the remaining funds coming from the company's cash holdings and from the sale of its "receivables," which are debts owed by customers. Under the Icahn plan, part of the company would remain publicly held and traded.

Icahn has publicly said that he also wants to transform Dell Inc., but he has spoken about potential cost savings and assets, such as Dell Inc.'s financial arm, that could be sold to raise funds. Mostly he has criticized Michael Dell and the company's board for overplaying the challenge the company faces and using "scare tactics" to persuade investors to support the buyout. Dell's special committee has noted that two-thirds of the company is related to sales of personal computers and that the company's cash flow from operations is deteriorating as sales of PCs weaken and competitors drive down prices. The committee has also suggested there is a "substantial downside risk" if the buyout is rejected, because the company's stock could drop substantially without the near-term prospect of a purchase.

"Why have they done this?" Icahn wrote in a recent open letter to investors. "In my opinion, they wish to frighten stockholders into selling Dell to Michael Dell and Silver Lake at what I believe is a bargain price."

While Icahn maintains the buyout offer doesn't reflect Dell Inc.'s true business value, the company notes that the stock market has devalued Dell Inc. and other PC-related companies in part because of slowing global PC sales. As recently as last November, Dell's stock was trading below $10 a share. The stock price started rising in December only after a Goldman Sachs report said the company might be a buyout candidate. Compared with that depressed stock price, the Michael Dell/Silver Lake offer price is more than 41 percent higher.

However, Icahn said his research into Dell Inc. and the PC business convinces him that there is substantial value in the more than two dozen young tech companies Dell has bought since 2008. Dell has spent more than $13 billion on promising technology acquisitions over the past five and a half years, and it has been pleased with their success. But the company says much more work needs to be done for it to become a major, broad-based information technology supplier.

"I believe that there are many opportunities to enhance the value of Dell through cost savings," Icahn wrote. "I believe that the board could have and should have given all shareholders the opportunity to benefit from these developments and not just their 'favorite son.'"

Analysts who follow Dell Inc. and the rest of the computer industry have, to this point, expressed skepticism about Icahn's intentions and his reported plans for the company.

The analysts note that Icahn has no experience running technology companies, and they don't think he wants to undertake the long-term struggle to revamp the company. Roger Kay of Endpoint Technologies Associates and others note that Icahn's past patterns have been to push for selling and spinning off assets as a way to bring quicker returns to investors.

If Icahn gains control of Dell Inc. and follows such past patterns of quickly selling assets, then analysts predict jobs could be cut as parts of the business are sold off. To be sure, not every Icahn investment has led to big asset sales, but many have.

"Icahn is a plague on Dell Inc. from an operating perspective," Kay said. "There is nothing good that he brings to the company."

Icahn already has signaled that, if he and his slate of directors gain control of the Dell board of directors sometime in the future, Michael Dell probably would be ejected as CEO.

"I don't think (Michael Dell) has done a good job, and I think the board has been asleep on the switch," Icahn told Bloomberg TV last week. "They should have held him accountable years ago. They have had a very poor performance. Instead of saying that you are out of here, they are going to reward him."

"A new CEO in this company would be a major plus," Icahn said in a separate story by the Wall Street Journal. Icahn hasn't said who he would tap as CEO if he gains control of the company.

But analysts including Kay say that the management buyout is Dell Inc.'s best hope for recovery and that will involve a lengthy retooling of the company.

"There is no magic bullet," Kay said. "Michael is not saying there is a quick fix. He is promising hard work and suffering over the next five years or longer to complete this transformation. And he wants to do it without looking over his shoulder at a volatile stock price."

A few major Dell Inc. investors have said they plan to side with Icahn and against the buyout offer. Those include Southeastern Asset Management, Austin-based Yacktman Asset Management and Pzena Investment Management.

Win or lose, Michael Dell has pledged to stay with the company.

"I will remain committed to doing my utmost for the company," he said in a presentation to investors. "I founded the company, and I will continue, as I have for the last 29 years, to try to make Dell the best company I can. I will also oppose the kind of imprudent recapitalization that has been suggested by certain other parties," meaning Icahn.

What that suggests to Kay is that Michael Dell will continue to battle against Icahn's plans for Dell Inc. even if the buyout is voted down, while Icahn has indicated he would try to get his own slate of directors named to Dell's board at a future regular shareholder meeting. If he is successful, Icahn could try to fire Michael Dell as CEO while supporting his plan to restructure the company.

Institutional Shareholder Services weighed arguments from both sides and issued a report last week that recommended shareholders accept the buyout deal. It reasoned that potential investment risks from voting down the buyout deal outweighed the likely investment gain.

The conclusion of ISS and two other investment advisory firms was viewed as a boost for the pro-buyout camp. The advisory firms are paid to offer impartial guidance to institutional investors when they are confronted with situations such as buyout offers for stock that they own. Many institutional investors are expected to vote according to the recommendation of the advisory firms.

"This gives (Michael Dell) a little more momentum," said Austin investment adviser Jim Nolen. The dispute with Icahn "is a political campaign right now, and Michael Dell has got the independent voters with him" because of the ISS report.

Technology analyst Rob Enderle with the Enderle Group also believe believes that, in the end, Michael Dell has the upper hand in the fight for the future of the company he founded.

"This is Dell's fight to lose," he said. "Dell is offering investors a sure thing. The Icahn deal is going to lose because there is too much downside risk" to investors.

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