Surprising no one but also pleasing no one, Dell (NASDAQ:DELL) reported a steep drop in second-quarter earnings Thursday, results that would cause any casual observer to wonder why the fight between company founder and CEO Michael Dell and activist investor Carl Icahn over the future of the personal computer maker has grown so acrimonious.
For the more seasoned observer, the results highlighted the challenges company will face no matter who dictates its next steps. With the backdrop of the collapsing personal computer market, recent quarterly results have brought the personal computer maker’s need to transform itself into the glaring spotlight.
Analysts expected the company’s quarterly results to show the effects of weakening PC demand, and they did. The current technological trend has left personal computers in the dust in favor of mobile devices like tablets and smartphones, and the world’s third-largest PC manufacturer is still behind the curve.
Although Dell’s second-quarter earnings managed to clear the low bar set by Wall Street, the results reported Thursday contained very little good news for investors. Net income came in at $204 million, or 12 cents per share, a 72 percent drop from the $732 million, or 42 cents per share, the company reported in the year-ago quarter.
The company generated $14.51 billion in revenue in a modest increase from the $14.48 billion reported a year ago. Excluding certain items, Dell reported a profit of 25 cents per share. On average, analysts expected the PC maker to post net income of 17 cents a share, or 24 cents on an adjusted basis, on revenue of $14.2 billion.
Similarly, the PC manufacturer reported that profit dropped 79 percent in the first quarter compared to the year-ago quarter, and revenue dropped to $14.1 billion.
That Dell’s situation grew worse during the first half of the year will come as no surprise to the industry, but the results will give a new perspective for both Michael Dell and Icahn. In particular, the dismal earnings bolster the argument Michael Dell and his financial backer, Silver Lake, have made: that Dell must diversify its business to avoid any further damage from the collapsing PC market and that diversification will be more successful if done away from the pressure of Wall Street. Still, that turnaround will not be easy to implement, as approximately 50 percent of the company’s revenue is currently generated from PCs.
“They did surpass very low expectations, but the year-over-year comparisons aren’t promising,” Robert W. Baird analyst Jayson Noland told Bloomberg. He holds a neutral rating on the company’s shares. “The PC market continues to trend below expectations. It will play into Michael Dell’s plea to take the company private.”
Shares of the PC maker have advanced a little more than 35 percent this year, buoyed by the sweetened $24.9 billion offer Michael Dell made to take the company private. The stock opened Friday at $13.70, 5 cents shy of the $13.75 per share buyout bid, which is a price just a dime more than the original offer.
The proposal now before Dell shareholders also includes a special dividend of 13 cents per share and a third-quarter dividend of 8 cents per share, both of which will be paid at or before the deal is closed. In exchange for the higher per-share price, the board of directors agreed to modify a voting rule so that a “majority of disinterested shares actually voting on the matter” is not required, meaning shareholders who abstain from casting ballots will not be counted as votes against the deal, according to the board. The vote on the proposal — which has been postponed three times for what Michael Dell has called lack of shareholder support — is now scheduled for September 12.
Activist investor Carl Icahn, a man known for taking large stakes in companies he judges to be ill-managed or undervalued and pushing for change, has been one of the most influential opponents of the privatization bid. His opposition has even hindered the takeover’s progress. But with Dell’s results showing ever-worsening conditions, his proposal may lose some support.
Icahn and fellow shareholder Southeastern Asset Management have proposed a tender offer for 1.1 billion of the company’s shares at $14 apiece, which would leave a portion of the company public; Dell would also remain largely a PC company. However, his plan can only be implemented if shareholders vote down Michael Dell’s offer and give him control of the board via a proxy fight.
In pursuit of his goals for Dell, the investor’s firm, Icahn Enterprises (NASDAQ:IEP), has launched a lawsuit against the company’s board of directors in Delaware. At the heart of Icahn’s suit is the board’s decision to amend the voting rule in return for a higher buyout offer. However, Delaware’s Chancery Court ruled not to grant Icahn’s request for an expedited hearing on Friday, finding there was “no colorable” claim the upcoming shareholder vote was rigged, according to The Wall Street Journal.
In fact, Chancellor Leo Strine nearly threw out Icahn’s argument that the special committee of the board of directors has unfairly guided shareholders to vote in favor of Mr. Dell’s proposal. “I think the special committee would dance in the streets if the Icahn group would make a topping bid that was firmly financed and would buy out everybody’s shares at a greater price,” Chancellor Strine said via the Journal.
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