A Dime Increase Could Be All It Takes To Send Dell Private
The buyout offer made by the founder and chief executive of the third-largest personal computer maker, Michael Dell, is on tenuous footing.
The vote has been postponed twice thanks to what Michael Dell has called lower-than-expected voter turnout, and the special committee of Dell’s board of directors has refused to change a voting rule he requested last week – a request made in the hope that it would help his bid succeed. Sources close to the company told The New York Times on Thursday that his offer of $13.65 per share is likely to lose the shareholder vote.
As outlined in the original agreement, any shareholder who abstained from voting their stake was counted as a vote against the deal. But Michael Dell believes that standard will unfairly “skew the playing field” because “the will of the majority may be defeated by the shares that do not vote.”
According to Carl Icahn and Southeastern Asset Management, authors of a rival proposal for Dell’s future, the rule change would clearly benefit the CEO. In a recent letter to shareholders, they noted that the overall ratio of votes for and against the go-private transaction is “roughly 50/50.” However, when non-votes are included, the ratio of votes cast thus far is closer to 4o percent in favor and 60 percent against the deal, they said.
The deal must be approved by a majority of Dell shareholders excluding company insiders like Michael Dell, who holds a 15.7 percent stake.
Michael Dell’s rule change request came with a sweetened offer. In return for the voting rule change, the buyout group said it would increase its offer price by a dime, to $13.75 — an appeal to shareholders who have complained that his offer undervalued the PC maker.
Sources familiar with the transaction told Reuters on Thursday that the higher price appealed to some of Dell’s largest shareholders, who have abstained from voting on the $24.4 billion proposal thus far. At that price, those key swing votes said they would back the go-private deal. The number of shareholders who are willing to change their vote and how much stock they owned was unclear. Still, this information shows that the standoff between Michael Dell’s buyout group, the special committee, and shareholders Icahn and Southeastern could be ended.
This standoff has so far only served to put Dell’s future in jeopardy. After the special committee rejected the rule change request, shares fell more than 4 percent to as low as $12.28 — their lowest level since news of a possible privatization offer went public on January 14. This drop illustrates just how uncertain shareholders are about the deal’s prospects. A source even told Reuters that MIihael Dell and his financial backer Silver Lake expect the deal to collapse unless the rule on how shareholder votes are counted changes.
The company’s board of directors and the buyout group believe the share price will plummet if the buyout deal is rejected. Michael Dell said in a July 21 regulatory filing that he expects the company’s stock to fall about $7.90 per share based on trailing earnings if the leveraged buyout offer is voted down. Even worse — at least according to the company and certain analysts — are the prospects the company faces if it does not go private.
Michael Dell believes the transition of Dell’s core business from personal computer manufacturing to enterprise services is best done as a private company. But if he is unable to take the company private, it will have to withstand even fiercer competition in the PC industry. Not only that, but industry analysts told The New York Times the company has been lowering prices on the machines it sells to businesses in hopes of winning customers, and that the practice has created very thin margins.
“They were cutting in anticipation of going private, making advances in a high-volume, low-margin business without having to show the results,” Gartner analyst Mikako Kitagawa told the publication. “They can’t be competitive with the pressure they’ll have from Wall Street.” It is not only Wall Street that is giving Dell pressure: both Lenovo (LNVGY.PK) and Hewlett-Packard (NYSE:HPQ) — the first- and second-largest PC makers, respectively — are expected to up the competition.
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