Risk & Compliance

Dell’s Biggest Shareholder Balks at Deal

“We believe the board’s sudden rush to sell is triggered by one thing: Mr. Dell’s desire to buy.”
David KatzApril 10, 2013

Charging that Dell Inc. is overly driven by founder Michael Dell’s desire to take the company private, the computer maker’s largest outside shareholder contends that the proposed $24.4 billion transaction would be a bad deal.

Southeastern Asset Management, which owns 8.4 percent of Dell, on Tuesday issued an open letter to a special committee of Dell’s board looking into Michael Dell’s bid for the company. The letter asserts that the committee undervalued the company in its assessment of the take-private deal.

Memphis-based Southeastern, which has $34 billion in assets under management, also contends that Dell Inc.’s March 29 preliminary proxy statement on the proposed transaction “disproportionately focused” on shrinking the company’s personal-computer business rather than on growing the company’s “high-quality”enterprise services business.

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The letter issued by Southeastern states that “the proxy statement fails to make a case for shareholders to accept the $13.65 per share Michael Dell/Silver Lake buyout offer.” (Silver Lake is a private-equity firm with a large portfolio of technology companies.)

In the proxy, Dell Inc. reports that it notified the board of Michael Dells intention to take the company private in August 2012. Southeastern charges in its letter that the proxy “clearly shows” that the special committee and the board “reached conclusions that stand in stark contrast” to the board’s thinking before August 2012. 

The proxy statement “reveals a robust process leading to an inadequate result,” the investment firm says. Over the past two years, Dell repurchased 224,000,000 shares for $3.4 billion, for an average price of more than $15.25 per share, Southeastern notes.

“The same board that was confident with Dell buying its shares for $15.25 is now attempting to convince all shareholders that Dell’s business is in such dire straits that they should take $13.65 and exit their investments,” according to the letter. “We believe the board’s sudden rush to sell is triggered by one thing: Mr. Dell’s desire to buy.”

(Dell Inc. and Sard Vebinnen, the special committee’s public relations counsel, did not respond to a request for comment by the time this story was published.)

In its valuation of Dell Inc., the special committee focused “disproportionately” on Dell’s end user computing (EUC) business, paying “little attention” to the company’s growing enterprise storage and services (ESS) business, says Southeastern.

Southeastern’s own “in-depth analysis” shows that when Dell’s completion of its “transformation to ESS” is done, the company’s future owners “should realize valuation multiples significantly higher than those reflected in the current offer price.”

In a message to employees that accompanied the preliminary proxy statement, Dell CFO Brian Gladden and Larry Tu, the computer maker’s general counsel, listed among the company’s “three transformational priorities in order to compete and win” the intention to  “[r]eignite our End User Computing (EUC) business.”

That push in EUC will consist of “profitably growing market share, expanding emerging country penetration, gaining tablet share” and driving growth in two units: services, software & peripherals and Dell Financial Services, the finance chief and the general counsel said.

The other two priorities stated by Gladden and Tu were for the company to become “a leading provider of end-to-end enterprise solutions and services” and for it to boost its sales and marketing efforts.

Besides Michael Dell’s offer, the company also got binding alternative acquisition proposals from a group affiliated with Blackstone Management Partners, the giant hedge fund, and from entities affiliated with buyout kingpin Carl Icahn. Southeastern prefers both offers to Michael Dell’s bid.

“We view these proposals as superior primarily because each offers shareholders the opportunity to remain owners of Dell while also offering a higher cash price to owners who choose to exit their investment,” Southeastern says in its letter. 

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