Can Michael Dell Withstand This Investor Revolt?

Michael Dell’s $24.4 billion proposal to take his namesake company private can make history as the biggest leveraged buyout since the financial crisis, but the deal is garnering more attention for the shareholder revolt it has prompted than for its size. After all, Dell’s (NASDAQ:DELL) independent shareholders think that the PC-maker is worth much more than the offered price of $13.65 per share, and if they get their wish, the amount of money involved could balloon.

Before the deal was made official, shareholders such as Pzena Investment Management (NYSE:PZN) warned that they would not support a proposal that valued the company at less than $20 per share. Now, Mr. Dell has on his hands the biggest shareholder uprising in years, just as was promised.

Bernstein analyst Toni Sacconaghi wrote in a late January research note seen by Barron’s that “simple math” indicated that the Dell leveraged buyout would likely be approved. Mr. Dell’s stake of 15 percent combined with the holdings of takeover arbitrageurs and index funds would create a formidable force for shareholders to oppose…
But Sacconaghi’s calculations are not simple any longer. Southeastern Asset Management, along with mutual fund giant T. Rowe Price (NASDAQ:TROW), has declared its opposition, and together they control nearly 13 percent of Dell’s shares. With Penza Investment and several smaller shareholders indicating resistance as well, approximately 19 percent of shares that are held independently could potentially be against the deal, which was announced last week.

Mr. Dell may soon be pressured to up the offer he made in conjunction with the private-equity firm Silver Lake. At least that is what analysts have predicted. On Tuesday, Jefferies’ Peter Misek wrote in a research note, seen by The New York Times, that the buyer consortium may need to offer a better deal if the leveraged buyout is to be approved. “I think the bid, as it stands, will not succeed,” he said in a telephone interview with the publication. But “at $15 you’ll be able to get a simple majority of shareholders,” he added.

A sweeter deal definitely needs to emerge, wrote Topeka Capital Markets analyst Brian White, who weighed in on the debate on Wednesday. White commented that his firm believes a higher bid must be made, citing emerging lawsuits and Southeastern’s battle preparations — the firm announced Monday that it would use a full range of tactics, including a proxy fight and lawsuits, to block what it termed an “ill-advised transaction.”
The firm has lifted its 12-month price target for Dell’s shares from $13.50 to $16.00, but White hastened to add that investors should not expect much more than that. Topeka’s revised price target reflects what the firm thinks is a reasonable takeover bid, reflecting a price to earnings ratio of 8.8 times the firm’s current estimate for 2013 earnings per share. It is also based on a weighted average valuation of what the firm viewed “as an appropriate multiple for the Company’s profit exposure to software, services and hardware.”

A bid of $16 per share would add approximately $4.2 billion to the total acquisition cost.

Any higher per-share offer could be a deal-killer, White said. A price of $24 per share, the value Southeastern has said shares of Dell deserve, would result in a price to earnings ratio higher than that of IBM (NYSE:IBM).

Dell may be trying to transform itself into a miniature IBM, but the PC-maker is not quite there yet. The company is much too exposed to the weakening demand for personal computers to liken itself to the technology behemoth. IBM’s sale of its PC business in 2005 enabled the company to focus on services and software, which in turn has driven revenue higher and created attractive margins, reads White’s note. And Dell has a long road to travel before it reaches that point. Dell is still very much tied to its PC business, which has caused some anxiety ahead of the buyout as the transformation of the company poses a tough challenge.

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