Dell Deadline Looms to Win Over Investors on Buyout Deal

Michael Dell's planned buyout of the personal-computer maker he founded isn't in the bag yet.

A fifth of Dell's shares are held by investors including Southeastern Asset Management Inc. and activist Carl Icahn, who oppose the deal, even after the $24.4 billion buyout proposal from Chief Executive Officer Dell and partner Silver Lake Management LLC got a surprise endorsement yesterday from Institutional Shareholder Services Inc. Two other shareholder-advisory firms followed suit.

That leaves Michael Dell just 10 days until a July 18 vote to win over undecided investors whose support could tip the deal in his favor. A special committee of Dell's board overseeing the transaction is meeting with major shareholders to seek backing for the buyout, and encouraging the CEO to do the same, a person familiar with the situation said. A failure to clinch a vote for the offer could send Dell's shares plunging and cloud the company's future.

"There are still several possibilities and there is a risk that the deal falls through," said Bill Kreher, an analyst at Edward Jones & Co. in St. Louis who has a hold rating on Dell shares.

Those hurdles were underlined yesterday when Icahn and Southeastern repeated their opposition to the buyout, which they said undervalues the PC maker. They were joined by another Dell shareholder, Yacktman Asset Management Co., which said it supports an alternative proposal from Icahn and Southeastern.

Majority Vote

The $13.65-a-share buyout proposal from Dell and Silver Lake requires a majority of votes to pass, excluding the CEO's own 16 percent stake in the Round Rock, Texas-based company.

Icahn, Southeastern and others opposed to the deal own more than 20 percent of Dell shares, according to a separate report yesterday from shareholder adviser Glass, Lewis & Co., which also backed the Silver Lake-led buyout proposal. Investors who owned Dell stock as of June 3 are eligible to vote their shares.

Getting to a majority vote may require some lobbying from Michael Dell and Silver Lake. While Dell's special committee is meeting with shareholders and has asked CEO Dell to do so as well, Silver Lake has declined to take part in those meetings because it regards itself as a minority investor in the buyout effort, according to a person familiar with the situation, who asked not to be identified because these meetings are private.

Best Interests

Dell's special committee declined to comment on what it will take to win the vote. In a statement yesterday, the committee said it was pleased ISS and other advisory firms had endorsed the buyout offer and said "a sale of Dell for $13.65 per share in cash will provide certainty of value at a substantial premium, and is therefore in the best interests of shareholders."

Dell shares dropped less than 1 percent to $13.36 at the close in New York.

In its recommendation, ISS cited a 25.5 percent premium to Dell's unaffected share price before the transaction was proposed and the certainty of value provided by an all-cash offer. The buyout plan would also shelter shareholders from risks tied to the deteriorating PC business, ISS said in its report.

"The alternative to accepting the buyout offer is to continue holding equity in a publicly traded Dell, with continued exposure to the risks and rewards of ownership," ISS said.

The ISS backing provides more ammunition to Michael Dell, who according to people familiar with the matter wasn't planning to sweeten the bid.

Delaware Hearing

Already last month, a Delaware Chancery Court declined a request by Icahn and other investors to block the deal, which they argued was the result of a flawed sales process.

"I do not see any plausible, conceivable basis in which to conclude that it is a colorable possibility that you could deem the choices made by this board to be unreasonable with all the different safeguards," Judge Leo Strine said at June 19 hearing.

If Michael Dell's deal was mispriced, a higher buyout offer would have emerged, Strine said, and Icahn's alternative proposal isn't a full takeover.

Close Race

"Icahn had momentum last week," said Brian White, an analyst at Topeka Capital Markets who recommends buying Dell shares. "Now with ISS coming back and supporting Dell, it's a closer race."

In response to the ISS decision, Icahn and Southeastern said, "We continue to believe that Dell's owners deserve better and can achieve more by voting against" the buyout. Icahn and Southeastern own a combined 12.8 percent stake in Dell, according to data compiled by Bloomberg.

That view was backed by Yacktman Asset Management, owns less than 1 percent of Dell's shares, according to data compiled by Bloomberg.

"We find it ironic that when a Dell management that has historically overpaid for acquisitions finally attempts to make a large acquisition at a price we find attractive, it is at the expense of Dell shareholders," Yacktman said in a statement yesterday.

Officials at another Dell shareholder, Pzena Investment Management Inc. (PZN), which has opposed the buyout, didn't return calls seeking comment.

Alternative Proposal

Michael Dell has said taking the company private will let him rebuild it as a supplier of data-center equipment and software to curb reliance on the flagging PC market after years of lackluster growth.

Under an alternative proposal, Icahn has pressed Dell to buy back about 1.1 billion shares at $14 apiece, while leaving the remainder of the company public. Icahn has said Dell has a brighter future ahead and current shareholders should have the chance to participate in a turnaround. Last week, Icahn said he obtained $5.2 billion in debt financing to support his latest effort to derail the proposed buyout.

For Icahn's own plan to succeed, however, he must convince shareholders to reject Dell's buyout. Then, Icahn needs them to back his efforts to gain control of the board in a proxy contest in which Michael Dell's vote will count.

Dell's woes have been compounded as the PC market has declined. PC shipments plummeted 14 percent in the first quarter, the steepest decline since market researcher IDC began tracking data in 1994. IDC, which projects that shipments will tumble 7.8 percent this year, is scheduled to release second-quarter PC market results July 10.

Dorm Room

Dell, who founded the company in his University of Texas dorm room in 1984 and took it public four years later, rose to become the world's top PC maker with a manufacturing system that turned out the machines faster and more cheaply than competitors. As the computing market has shifted toward mobile devices like tablets and smartphones, Dell has struggled to remake itself.

Sales in fiscal 2012 declined 8.3 percent to $56.9 billion and net income tumbled 32 percent to $2.37 billion. This year, Dell is expected to earn $1.44 billion, less than half seen in 2005, according to the average of analysts' estimates compiled by Bloomberg.