Can Dell Do Better Than Silver Lake?

“Lack of exit strategy” and “sheer size” are two phrases dogging Dell’s (NASDAQ:DELL) search for a buyer. They caused analysts to initially doubt the viability of a leveraged buyout, and they will most likely prevent the computer company from fielding any offers better than the bid made by Silver Lake and its partners, which include Microsoft (NASDAQ:MSFT).

Founder and Chief executive Michael Dell, who holds a 16 percent stake in the computer company, has already given his backing to the buyout proposal made by the private equity firm. Now, the “go-shop” period has begun, which allows Dell to look for offers from other companies to guarantee it has agreed to the best possible proposal.

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But Dell is not expected to find a better offer. Senior executives at the private equity firms competing with Silver Lake told Reuters anonymously that they were unlikely to top its proposed bid.

“I just don’t think it is doable to break up the current consortium,” one executive said. “When management is rolling over (their stake) and they have picked a partner, it is hard to top the agreed offer.” The executive cited the lack of an exit strategy and the sheer size of the deal as additional problems, according to the publication.
Bernstein analysts wrote in a January 18 note seen by Reuters that they “suspect that the deal would likely be transacted at around $14-$14.50 per share.”

To determine whether Silver Lake’s offer is the best option, Dell has formed a special committee of the board and hired Evercore Partners (NYSE:EVR). In this case, an advisory board is of especial importance as Silver Lake has close ties to Dell, which could raise conflict of interest problems; Dell’s software president John Swainson served as senior advisor at the private equity firm until 2010 and Microsoft bought its Internet phone service Skype from the firm in 2011.

Michael Dell’s involvement is also a problem. Executives who have significant stakes in a company and are involved in the deal can also find themselves conflicted. As executives, their role is to secure the best deal for shareholders, but it would be in their best interest to buy out the company at a low price.

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