Dell Shareholders Resist Buyout Deal

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Dell’s largest shareholders, amongst others, is arguing that the £24.4bn buyout deal undervalues the company

Dell is getting pushback from some investors on the $24.4 billion (£15.4bn) plan to take the company private, with the company’s largest independent shareholder saying it will vote against the deal.

In a filing with the Securities and Exchange Commission (SEC) on 8 February, officials with Southeastern Management said the $13.65 per share offered to investors – despite being a 25 percent premium over the value of the stock almost a month ago – was far too low for Dell, and that they would not support it.

Proxy fight

They said Southeastern Management, which holds about 8.5 percent of shares in the world’s third-largest PC maker, would oppose the deal with all the options at its disposal, including a proxy fight.

In a letter to Dell’s board of directors, also dated 8 February and included in the SEC document, the investment firm in the filing said it felt “extreme disappointment regarding the proposed go-private transaction, which we believe grossly undervalues the Company. We also write to inform you that we will not vote in favour of the proposed transaction as currently structured.”

After weeks of speculation, Dell announced 5 February that it was partnering with investment firm Silver Lake Partners, Microsoft and others to take the company private in a move analysts said was designed to enable executives to accelerate plans to transform the company from a PC maker into an enterprise IT solutions provider, and to do so without the pressure of having to meet quarterly financial goals.

Michael Dell with Streak TabletThe move garnered mostly positive reaction from analysts, who said founder and chief executive Michael Dell would it easier to manoeuvre outside of the glare of Wall Street.

Michael Dell already owned 14 percent of the company, and added almost $1 billion of his own money to retain control once the company goes private.

Commercial scrutiny

“The deal will allow Dell to pursue its long-term strategy without having to endure the commercial market’s constant scrutiny,” Charles King, principal analyst with Pund-IT Research, wrote in a 5 February research note. “That may sound picayune but in looking at Dell’s balance sheet, you find a company that has been consistently profitable (in fact, 2012 was reportedly Dell’s best year) while its largest traditional business (PCs) has been under significant, increasing pressure. In spite of that, the company’s shares have lagged those of many competitors. Going private should allow Dell to escape the ‘noise’ of the market’s obsession with short-term financials and better focus on the ‘signal’ of its long-term strategy.”

However, some investors believe the company is worth more than the $13.65 a share the deal calls for, and are threatening to do what they can to derail it. Southeastern Management officials, in their letter to the Dell board, said they did not oppose the idea of Dell going private, but that the price was too low and unfair to shareholders.

“Unfortunately, the proposed Silver Lake transaction falls significantly short of that, and instead appears to be an effort to acquire Dell at a substantial discount to intrinsic value at the expense of public shareholders,” the letter said.

Southeastern Management is the largest shareholder to oppose the plan, but not the only one. Nick Tompras, president of Alpine Capital Research, was quoted in a Reuters story on 8 February that his firm would vote its 2 million Dell shares against the deal.

“Let the fools sell low – don’t make us all fools,” Tompras said.

Arnie Schneider, president of Schneider Capital Management, which owned about 350,000 Dell shares in September, said that firm also would vote against the deal, Reuters reported.

Legal investigation

The deal also is garnering attention from law firms that are investigating whether the deal undervalued the company.

In a 5 February statement, lawyers from the Briscoe Law Firm and Powers, Taylor LLP said their “investigation centres on whether Dell’s shareholders are receiving adequate compensation for their shares in the proposed going private deal, whether the transaction undervalues Dell’s stock, and whether Dell’s board attempted to obtain the highest share price for all shareholders prior to agreeing to the deal. Notably, at least one analyst with Yahoo! Finance has estimated that the true inherent value of Dell shares is as high as $16 per share.”

Lawyers with the New York City firm of Levi and Korsinsky also questioned the price of the deal, and said they were investigating.

The deal calls for a 45-day “go shop” period where the special committee appointed by the Dell board to handle the negotiations can entertain other offers. However, the termination fees of $180 million or $450 million make it unlikely that other offerings will be made.

Sources also told Reuters that the group buying Dell hope shareholders will learn through regulatory filings of the various alternatives Dell officials and board members investigated before taking to take the company private – including leaving it as is and breaking off the PC business – and that there are no other options other than taking it private.

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Originally published on eWeek.