Southeastern Asset Management
Issues Open Letter to Dell Special Committee
Believes Dell's proxy
statement shows that process resulted in inadequate outcome; provides no
justification for Dell to go private
Proxy disproportionately focused on shrinking PC business over growing,
high-quality enterprise services business
Urges Special Committee to act in best interests of all Dell shareholders
MEMPHIS, Tenn., April 9, 2013
/PRNewswire/ -- Southeastern Asset Management, Inc., the largest outside
shareholder of Dell Inc. (NASDAQ:
DELL), today released an open letter to the Special Committee of the
Dell Board of Directors and addressed Dell's preliminary proxy statement.
The full text of the
letter is as follows:
April 9, 2013
Special Committee of the Board of Directors
One Dell Way
Round Rock, TX 78682
RE: Dell Inc. Proxy
Dear Members of the
As the beneficial
owner of 8.4% of Dell Inc.'s outstanding shares, we are writing today to
express our views regarding the Company's proxy statement. It is our
position that the proxy statement fails to make a case for shareholders to
accept the $13.65 per share Michael Dell /
Silver Lake buyout offer. In addition, we believe that the Special
Committee conducted a process that resulted in an inadequate outcome.
According to the
proxy statement, Mr. Dell notified the Board of his intention to take the
Company private in August 2012. The proxy statement clearly shows that, in
their review, the Special Committee and Board of Directors reached
conclusions that stand in stark contrast to views held by the Board prior
to August 2012. While the Special Committee may have worked diligently and
was assisted by credible and reliable professionals, even a good process –
without the exercise of proper business judgment – can result in a bad
Reveals a Robust Process Leading to an Inadequate Result
Over the last two
years, under a Board authorized program, the Company has repurchased
224,000,000 shares for $3.4 billion at an
average price of over $15.25 per share. The
same Board that was confident with Dell buying its shares for
$15.25 is now attempting to convince all
shareholders that Dell's business is in such dire straits that they should
take $13.65 and exit their investments. We
believe the Board's sudden rush to sell is triggered by one thing: Mr.
Dell's desire to buy.
proxy statement and the analysis performed by the Special Committee focus
disproportionately on the End User Computing (EUC) business while giving
little attention to the Enterprise Storage and Services (ESS) business.
Southeastern's in-depth analysis indicates that at the completion of the
Company's transformation to ESS, Dell's future owners should realize
valuation multiples significantly higher than those reflected in the
current offer price.
It is not
about the PC. It is not about the PC. It is not about the PC…
repeatedly highlighted the ESS business on previous earnings calls and
provided estimates that show that ESS will account for 35% of the
Company's fiscal 2014 estimated revenue and 58% of its fiscal 2014
estimated Non-GAAP operating income (OI). Because the 58% of Dell's 2014
estimated Non-GAAP OI attributable to ESS is worth a much higher multiple
than the 42% of Company profits tied to the EUC segment, the ESS
business, Dell's cash and Dell Financial Services (DFS) are worth far more
than half of total corporate value (see Table 1).
Table 1: Business Contributions(2)
(B = Billions of USD)
Net Cash + DFS
(1) Includes the PC business and PC-related operations of the
Support & Deployment and Software & Peripherals businesses
(2) Estimates based on numbers from Dell FY14 projections and Wall
Yet, in all the
analytical work and the voluminous proxy statement, EUC and PC are
referenced hundreds of times more frequently than ESS. This is a stark
contrast to the Company's prior emphasis on the emerging value of ESS.
Given this change in public positioning, Dell's shareholders should
question why the Board is suddenly focused on EUC, and not on ESS – which
was previously believed to be the future of the business.
In addition, the
Board's approach of initially limiting the potential acquirers to private
equity firms that would allow Mr. Dell to have majority ownership of the
Company and remain as CEO narrowed the potential bidders materially and
contributed to the Board's approval of a transaction at a price that
undervalues the Company.
In fact, within the
proxy statement, virtually every justification of the
$13.65 per share price is based on a premium
to market at the time of the analysis. Such an approach is misleading when
it is based on a price at the low end of the trading range over the last
15 years. Instead, any valuation analyses should have compared the
$13.65 offer price to the net asset value of
the Company. Additionally, the valuation analysis should have focused on
an appropriate multiple of the Company's free cash flow per share, more
than half of which is from the growing ESS business, plus the net cash on
the balance sheet and the value of DFS.
Committee Gave Limited Consideration to Shareholder Friendly Alternatives
February 8, 2013, letter to the Board, we
stated that we would have been prepared to support a leveraged
recapitalization and suggested it could have been done in the form of a
$12 per share special dividend, a Dutch
auction or another structure that would have allowed shareholders an
opportunity to participate in Dell's future. Despite the viability of such
a transaction, the proxy statement shows that the Board and Special
Committee spent little time researching a leveraged recapitalization. The
lengthy proxy statement only discusses the "pros" and "cons" of a
leveraged recapitalization on a handful of pages and in only a cursory
manner. The proxy statement also does not provide any real analysis or
give any attention to solutions that would have either allowed
shareholders to receive a large special dividend or to remain shareholders
of a company with a smaller share base. It appears that neither the Board
nor the Special Committee aggressively pursued the leveraged
recapitalization idea because senior management preferred a go-private
In addition, as
widely reported, management spent over $13 billion
on acquisitions of non-PC businesses which benefit from the very same
cloud and mobility trends that are negatively impacting the PC business.
Long-term owners such as Southeastern have supported Dell in its
transformation into an enterprise solutions company, but are not being
given the opportunity to participate in the return on that
$13 billion investment.
January 29, 2013, Southeastern sought a
meeting with the Special Committee in response to market leaks regarding a
reported go-private transaction. In that meeting, we asked the Special
Committee why giving shareholders a choice, through some form of
cash/stock election, would not be preferable, and in fact fairer, for
those shareholders who want to participate in the Company's upside. Dell's
proxy statement answers that question: quoting from page 38, "Mr. Dell and
Silver Lake were not interested in pursuing a transaction such as the one
proposed by Southeastern in which public stockholders would retain an
interest in the Company."
Statement Contains No Justification to Take Dell Private
The proxy statement
does not contain any sound reasoning for why, at this stage in the
transformation, the Company needs to be taken private. In the entire proxy
statement, we found only one page (page 82) devoted to Mr. Dell's plans
for the Company following the transaction. That single page is consistent
with the Company's prior public statements, and nothing about these plans
requires that the Company be private.
In fact, in an
interview with ZDNet two weeks ago,
John Swainson , head of Dell's
software unit, essentially confirmed that it doesn't matter whether Dell
is public or private. He said, "the corporate structure of Dell doesn't
make a difference on how customers interact with our products or how we
develop or sell them." We note that many companies, including IBM, were
able to successfully transform their businesses as public companies. In
addition, BCG, an advisor to the Special Committee stated that "many of
the 'take-private' value levers could (in principle) be applicable to
[Dell] as a public company."
The proxy statement
reveals that the Board had become increasingly frustrated with
management's execution of the transition, and rather than try to solve the
problem, it chose to give Mr. Dell the opportunity to purchase the Company
from shareholders at an inadequate price. Mr. Dell would not be
participating in the proposed go-private transaction if he did not believe
in the Company's future upside and his ability to execute the
transformation of the business.
Committee Has the Power to Act in the Best Interests of All Dell
As we noted above,
we believe the proxy statement fails to make a case for shareholders to
accept the $13.65 per share Michael Dell /
Silver Lake buyout. For shareholders trying to decide whether to support
the transaction, the Company's suspension of earnings guidance and
extremely limited discussion of the Company's future plans will make it
difficult to make an informed choice. In the next draft of the proxy, the
Special Committee should provide sufficient detail about Mr. Dell's future
plans so that public shareholders can properly evaluate their options.
Committee has obtained two preliminary alternative proposals, both of
which we view as superior to the Michael Dell / Silver Lake buyout. We
view these proposals as superior primarily because each offers
shareholders the opportunity to remain owners of Dell while also offering
a higher cash price to owners who choose to exit their investment.
the Special Committee to negotiate and evaluate these alternatives in good
faith, and to recognize that offering shareholders a choice is a win / win
outcome for all parties. We call upon the Special Committee to work hard
to make this possibility a reality.
O. Mason Hawkins
G. Staley Cates
Chairman & CEO President & CIO
SOUTHEASTERN ASSET MANAGEMENT
Management, Inc., headquartered in
Memphis, Tenn., is an investment management firm with
$34 billion in assets under management
acting as investment advisor to institutional investors and the four
Longleaf Partners Funds: Longleaf Partners Fund, Longleaf Partners
Small-Cap Fund, Longleaf Partners Global Fund and Longleaf Partners
International Fund, as well as two Irish domiciled UCITS Funds: Longleaf
Partners Global UCITS Fund and Longleaf Partners US UCITS Fund.
Southeastern was established in 1975, and the first of the Longleaf
Partners Funds was launched in 1987.
SOURCE Southeastern Asset Management, Inc.
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