Dell’s Leveraged Buyout With Silver Lake Backed By ISS
Dell Inc. (DELL) investors should accept founder Michael Dell’s $24.4 billion leveraged buyout plan for the company, Institutional Shareholder Services Inc. said, in a surprise endorsement of the deal.
ISS, the biggest shareholder-advisory firm, cited a 25.5 percent premium to Dell’s unaffected share price, the certainty of value provided by an all-cash offer and the transfer of risk given Dell’s deteriorating PC business among reasons for supporting the bid. The chief executive officer proposed to repurchase Dell shares at $13.65 each with partner Silver Lake Management LLC.
“The fear of a big drop in the stock below the $13.65 offer overcame the reluctance to let Michael pay too little for complete control of the company,” Erik Gordon, a professor at the University of Michigan, said in an e-mail.
ISS’s influential recommendation could sway the final outcome because institutional investors look to ISS’s findings for guidance on how to vote their shares. It also lessens pressure on Dell to sweeten his offer. He is contributing his 16 percent ownership in the company at $13.36 apiece compared to the $13.65 offered to other shareholders and another $750 million in cash.
In German trading today, the stock was down 0.2 percent to the equivalent of $13.11 at 1:04 p.m. in Frankfurt. The stock closed at $13.03 in New York on July 5.
Shareholders’ Choice
“The issue facing Dell shareholders at this meeting has been framed in some media commentary as a choice between the sale to Michael Dell and Silver Lake Partners, or the leveraged recapitalization proposed by Icahn and SAM. It is not,” ISS said in its report today, referring to Carl Icahn’s efforts to counter Dell’s offer. “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.”
Icahn, teamed with Dell shareholder Southeastern Asset Management Inc., 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.
No Sweetener
Dell and Silver Lake Management aren’t planning to sweeten their buyout offer because the proposal they made in February represents a fair and significant premium to where the stock would trade if the deal fell apart, people with knowledge of the situation said July 5. As recently as last week, ISS was leaning against recommending Dell’s offer, people familiar with the matter said at the time.
Its recommendation is a decisive moment in the five-month tug of war over Dell, which is now headed into its final act. Dell shareholders are scheduled to vote July 18 on the leveraged buyout proposal at a meeting at the company’s Round Rock, Texas, headquarters. CEO Dell has said taking the company private will let him rebuild it as a supplier of data-center equipment and software to reduce reliance on the flagging personal-computer market after years of lackluster growth.
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.
Dell’s Creation
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 2012 declined 8 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, according to data compiled by Bloomberg.
CEO Dell told his board that going private would be the best course of action because it would let him boost spending on acquisitions, sales staff and research and development, while investing in PCs and tablets and expanding Dell’s reach in emerging countries, according to a March filing with the U.S. Securities and Exchange Commission.
Source:Bloomberg
