THE WALL STREET JOURNAL.
Updated March 20, 2013, 9:36 p.m. ET
Dell Walks Fine Line in
Pitch for Buyout
Chief executives typically like
to boast about their companies, but as a Friday deadline for rival bids to
buy his firm approaches, Michael
Dell finds himself in the opposite position.
Dell needs to persuade Dell Inc. investors that the prospects for the
company he founded in his dorm room in 1984 and has been running for the
past six years are anything but rosy if he is to succeed with his plan to
take the computer maker private.
CEO Michael Dell
Friday marks the end of a 45-day window to flush out alternative offers to
the $24.4 billion buyout deal that Mr. Dell and private-equity firm Silver
Lake Partners reached last month. The $13.65-a-share offer has sparked
derision from some shareholders who believe the price undervalues the Round
Rock, Texas, company.
alternative bid has emerged. Absent a rival offer, Dell has said it would
schedule a shareholder vote on the proposed buyout in June or early July.
sets up months of debate over two differing outlooks on Dell—including Mr.
Dell's unusual position of having to talk down his company's prospects in
order to get shareholders to accept the current offer.
of that position is expected to be set out in a public filing that Dell is
set to issue in coming weeks. In the proxy filing, said people familiar with
the matter, Dell is expected to say that its board asked an outside firm to
provide a financial forecast for Dell's current fiscal year ending in
January 2014, after a string of financial projections by Dell management
proved overly rosy.
proxy, these people add, is expected to say Dell's board was thus compelled
to take the company in a different direction and that the offer from Silver
Lake and Mr. Dell was the best option.
proxy is also expected to say that Mr. Dell wasn't responsible for the
forecasting, these people note.
Under the proposed buyout, Mr. Dell would continue to lead Dell and would
contribute his 14% ownership stake in the company toward the buyout.
preparation of the proxy is still in progress, one person said, and it is
unclear what form the final language will take.
For weeks, private-equity firm
Blackstone Group LP has scoured Dell's financial records weighing a
potential bid, said people familiar with the matter. Other technology
companies and private-equity firms have also either been approached or
considered jumping into the deal fray.
wealthy investors, O. Mason Hawkins and Carl Icahn, have argued the sky
isn't falling on Dell and therefore stockholders deserve more money.
Mason's Southeastern Asset Management Inc.—Dell's largest outside
shareholder with an 8.4% stake—last month said the company is worth close to
$24 a share, a level the computer maker's stock price hasn't approached
since 2008. Shares closed Wednesday at $14.33 on the Nasdaq Stock Market.
company and Silver Lake haven't publicly commented on Southeastern's
analysis, but Wall Street analysts say a fair value for Dell shares is
closer to $14 a share to $15 a share.
Meanwhile, Mr. Icahn wrote a letter to Dell's special board committee that
was disclosed this month, in which the investor proposed the company use
cash and debt to pay shareholders a $9-a-share special dividend, totaling
$16 billion, and keep their shares rather than accept the buyout group's
bid. Mr. Icahn said in a letter to Dell's board that he owns a "substantial"
stake in the company, though he hasn't detailed the size of his holding.
In a financial analysis
Southeastern released last month, the firm said the fair value of Dell's PC
business, which generated roughly $1.3 billion of the company's $3.01
billion operating profit for the year ended Feb. 1, may be close to $3 a
share, if each dollar of profit translates into $4 or $5 in per-share value,
as reflected in the market value of rival PC businesses such as
person familiar with Southeastern's thinking said the $2.6 billion in
operating profit generated by non-PC businesses should be valued at 14 or 15
times earnings, or more than $13 a share.
Southeastern has said Dell's main businesses, not taking into account the
company's cash stockpile and the value of Dell's small but profitable
financial-services business, means Dell is worth significantly more than the
current $13.65-a-share buyout offer.
gamesmanship leaves Dell shareholders to puzzle over the options. James
Rosenwald, managing partner at Dalton Investments LLC, which reported owning
1.24 million Dell shares as of Dec. 31, said he is confident there will be a
higher price for Dell, whether it comes from a sweetened bid from Mr. Dell
and Silver Lake's buyout group or another option, like Mr. Icahn's.
Mr. Rosenwald said there is uncertainty about all options, such as whether
banks would be willing to lend more money to feed a higher price.
of this makes Dell's proxy more important, as the document will likely be
closely scrutinized by shareholders as they decide whether to give their
blessing to the proposed deal.
filing is expected to focus in part on a review of corporate financial
forecasts presented to the board starting last summer, the people familiar
with the matter said. Dell managers said they expected $5.6 billion in
adjusted, or non-GAAP, operating profit for the fiscal year that ends in
early 2014, the people said.
But around that time, Dell began
badly missing the targets set forth by managers, who were counting on the
Microsoft Corp.'s new Windows 8 operating system and an increase in PC
sales to drive Dell's profits higher in 2014. At that point, Dell's board
sought a forecast from an outside firm, said the people familiar with the
rather than the $5.6 billion figure, Dell expects an operating profit closer
to $3 billion, its lowest in years, the people said.
People working on potential challenges to the Dell offer say the revelation
of information on the background of the deal before the proxy is filed could
dissuade counter bids or make it tougher for another party to shore up
Write to Shira
Ovide at email@example.com
and Sharon Terlep at
A version of this
article appeared March 21, 2013, on page A1 in the U.S. edition of The Wall
Street Journal, with the headline: Dell Walks Fine Line In Pitch For Buyout.
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