Hey Nasdaq, It’s Finally Time to Say Bye to Dell


Michael Dell, who began the eponymous company from his college dorm room in 1984, has finally convinced shareholders that his privatization plan is the best option for the struggling personal computer maker.

It took months spent arguing against a rival offer made by the company’s largest outside shareholder, Carl Icahn, plus a sweetened bid before shareholders decided to approve the $24.9 billion buyout. Michael Dell was even forced to postpone the vote three times for what he called lack of shareholder support. For a time, shareholders were swayed by Icahn’s argument that the company was worth more than the $13.75 per share Michael Dell and his financial backer Silver Lake offered.

But after the vote was delayed time and time again, Icahn became convinced that he had been outmaneuvered and exited the fight just before the final September 12 vote. Without the activist investor’s fierce opposition, shareholders voted Thursday in favor of selling Dell (NASDAQ:DELL) to its founder and CEO.

The New York Times learned through source briefed on the matter that about 65 percent of shares that were voted approved the buyout.

Icahn and his firm, Icahn Enterprises (NASDAQ:IEP), chose not pursue their rival proposal not because of any worries that the declining PC industry would present too great of an obstacle to engineer a turnaround, but because of Michael Dell’s tactics. “We won, or at least thought we won, but when the board realized that they lost the vote, they simply ignored the outcome,” Icahn wrote in a letter to shareholders, referring to the three times the vote was postponed.

Icahn, an activist investor, is known for taking large stakes in companies he judges to be ill-managed or undervalued and pushing for change. He began amassing his 8.9 percent stake in the struggling Dell earlier this year.

His investing turned into a bid rivaling the go-private offer made by Michael Dell at the beginning of March. With Icahn leading the way, many other large shareholders began to oppose the privatization proposal. At the heart of Icahn’s argument and the opposition expressed by other shareholders was the matter of valuation.

They argued that even though the market for PCs was evaporating — IDC predicted shipments to fall 10 percent this year — it was worth more than what Michael Dell offered. The point often highlighted is the fact that Dell managed to generate $3.6 billion in earnings before interest, taxes, and amortization last quarter despite the fact that more than half of its business comes from PC sales.

While Dell will now be going private regardless, Icahn has sent the question of appraisal to the Court of Chancery in Delaware, where Dell is incorporated. Depending on the outcome, the court will require Michael Dell to pay the shareholders who brought the litigation whatever value the court determined was fair.

For shareholders, the uncertainty is gone even if the question of valuation has not yet been settled. “By voting in favor of the transaction, the stockholders have chosen the best option to maximize the value of their shares,” said Alex Mandl, chairman of the Special Committee formed to evaluate the transaction and other alternatives, in a press release. In July, the Special Committee reiterated its long-held recommendation for shareholders to accept Michael Dell’s bid.

“To summarize, while the Company’s strong balance sheet makes it possible to borrow significant amounts, we consider it unwise to layer substantial financial risk on a company already facing significant challenges from competition and from the rapid pace of technological change,” the document stated, along the lines of what Icahn proposed. His offer would have left a portion of the company public and kept Dell largely a PC company.

The difficulty of convincing shareholders to approve the CEO’s $24.9 billion bid to take the PC maker private over the loud protestations of Icahn and other major investors pales in comparison with the task Michael Dell is now facing: turning around Dell’s fortunes.

On Wednesday, Standard & Poor’s downgraded the company’s debt to junk status, and last month, the company reported second-quarter net income that came in at $204 million, or 12 cents per share, a 71 percent drop from the $732 million, or 42 cents per share, the company reported in the year-ago quarter.

While revenue increased modestly from the year before, that increase came at a cost. To grab market share from competitors Lenovo (LNVGY.PK) and Hewlett-Packard (NYSE:HPQ), the company significantly discounted its PCs, a move that boosted sales but cut into margins and earnings.

But it was a deliberate strategy. With Ebitda of $3.6 billion in the last quarter, Dell can use that cash to invest in the other side of its business — the enterprise service side, which, like PCs, is a low-cost, low-margin business. However, as Bloomberg’s Cristina Alesci noted earlier this week, the question is how soon servers will become the next PC.

“I am pleased with this outcome and am energized to continue building Dell into the industry’s leading provider of scalable, end-to-end technology solutions,” Michael Dell said in the press release announcing the vote tally. “As a private enterprise, with a strong private-equity partner, we’ll serve our customers with a single-minded purpose and drive the innovations that will help them achieve their goals.”

He believes this transformation is best done away from the pressures of Wall Street. The deal is expected to close before the end of the third quarter of Dell’s fiscal year.

Follow Meghan on Twitter @MFoley_WSCS

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