Dell Inc is set to disclose next week that its largest
independent investor, Southeastern Asset Management, originally expressed
interest in joining the proposed leveraged buyout deal that it now
opposes, according to two people familiar with the matter.
January 29, a week before the technology company's founder Michael
Dell and private equity firm Silver Lake Partners announced
their $24.4 billion buyout bid, Southeastern and its lawyers met with one
of Dell's independent directors, Alex Mandl, who was part of a special
committee reviewing the company's strategic options. Also at the meeting
was the committee's legal adviser, Debevoise & Plimpton LLP.
Southeastern said at the meeting that it was interested in joining the
leveraged buyout and retaining a stake in
Dell, said the sources who had knowledge of the Dell filing on
the proposed merger, which is expected to be published as soon as next
Monday. Southeastern owns 8.5 percent of Dell, which made its name as a
personal computer maker, but now also sells
software and technology services.
Southeastern also said it would oppose any buyout in the range of $14 to
$15 per share (a range that had been mentioned in some media articles)
that did not permit participation by large shareholders, one of the two
sources said. The proposed deal, announced on February 5, is for $13.65
Representatives for Dell and Southeastern declined to comment.
Southeastern has said publicly since the proposed buyout was announced
that Dell is worth at least $24 per share, and the asset management
company has been trying to persuade other shareholders to oppose the
is unclear what Mandl's response was to Southeastern's request to join the
buyout or whether Southeastern's proposal was communicated to Michael Dell
and Silver Lake.
People close to the Dell camp say the merger document will show that
Southeastern is now trying to kill a deal that it had wanted to
participate in. But a person close to Southeastern said there is no
inconsistency in their private discussions and public statements.
The person close to Southeastern pointed to the money manager's February 8
public letter to Dell's board, which stated that Southeastern would have
endorsed "a go-private type sale where current shareholders could elect to
continue to participate in a new company with a public
stub...Unfortunately, the proposed Silver Lake transaction falls
significantly short of that."
is unclear whether the buyout group's insistence that the company be taken
private was critical in Southeastern's eventual opposition to a takeover
by the Michael Dell-led group.
Managers at Alpine Capital Research in St Louis, who have said they would
vote their 2 million shares against the buyout, praised Southeastern,
which manages the Longleaf family of funds, for sticking up for
shareholders in the January talks.
"Looks positive to me," said Willem Schilpzand, an associate portfolio
manager. "Sounds like Longleaf is fighting for the public leverage recap
(where all shareholders stay in) or the option for shareholders to opt in
to a going private deal."
"Either way, it looks like we would have the option of participating or
not. That is all we can really ask for," Schilpzand said.
Dell's board has approved the Silver Lake buyout and also set a 45-day "go
shop" period to see if better alternatives emerge. The period ends early
Memphis-based Southeastern, led by fund managers Mason Hawkins and Staley
Cates, has a lot of money riding on Dell. The fund accumulated its Dell
stake - worth about $2 billion - at an average cost of $16.88 per share.
That adds up to a loss of almost $400 million at the current buyout price.
Billionaire investor Carl Icahn has also thrown his weight against the
buyout, arguing that Dell should borrow money to pay shareholders a
special dividend of $9 per share instead. He has not disclosed the size of
his stake, but CNBC reported on March 6 that he owned about 100 million
shares, or 6 percent of Dell.
The buyout requires approval from a majority of shareholders excluding
Michael Dell, who controls about 16 percent. Southeastern and several
publicly declared allies, such as fund manager T. Rowe Price, control at
least 14 percent.
SOUTHEASTERN, UNDER THE GUN
Some analysts and rival fund managers say Southeastern's activism is a
sign the fund is feeling pressure to perform, after losses in the
aftermath of the financial crisis marred an otherwise strong track record.
Hawkins and Cates often say they succeed by being right 60 percent of the
time. Now they have to convince other Dell shareholders that this
particular case does not count among the other 40 percent -- when they're
Longleaf boasts a strong record, helped by outperformance in the first
bear market of the 2000s. It gained an average of 6.55 percent a year over
the past 15, beating the Standard & Poor's 500 Index by more than two
percentage points a year and coming in ahead of 91 percent of similar
funds, according to data from Lipper, a unit of Thomson Reuters.
But it stumbled through the financial crisis, losing over 50 percent of
its value in 2008 versus S&P's 37 percent decline.
When Southeastern first bought into Dell in 2005 in the mid-$30s range,
the firm crowed to investors in an annual report that it was paying
"fire-sale prices." Dell is now trading at less than half that.
The firm has used activism rarely and only as the last resort after an
initial investment has gone wrong. It has gotten involved as an activist
25 times in 23 U.S. companies since 1996. Dell is the largest company it
has so far taken on, nearly double the value of second-ranked
Chesapeake Energy Corp, according to FactSet's SharkRepellent
Last year, it lobbied for changes at Chesapeake after a series of Reuters
reports that CEO Aubrey McClendon had been borrowing from a lender who was
also a big source of funding to the company. McClendon left the company
this year but Southeastern was left with an estimated loss of $300 million
to $400 million on its $2.3 billion original investment.
Financial adviser Peter Gellman in Highland Park, New Jersey, who has for
years invested in Longleaf, said all value investors "have some black
spots on their record."
"No one is perfect," said Gellman, who supports the firm's stance with
Dell. "They will get active when they judge it appropriate - they're not
(Reporting by Nadia Damouni in New York and Aaron Pressman in Boston;
additional reporting by Poornima Gupta in San Francisco; Editing by
Soyoung Kim, Tiffany Wu and Ken Wills)