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Big Seal of Approval for Dell Founder’s Buyout Bid
By MICHAEL J. DE LA MERCED July 8, 2013, 7:03 am
Cited from http://dealbook.nytimes.com/2013/07/08/i-s-s-backs-dell-buyout-offer/
Michael S. Dell received a strong endorsement on Monday after an influential shareholder adviser backed his $24.4 billion takeover bid for the company he founded, a move that could end the monthslong fight over control of Dell Inc.
Institutional Shareholder Services, the biggest American proxy advisory firm, recommended that Dell investors accept the $13.65-a-share offer made by Mr. Dell and the investment firm Silver Lake. Other such firms, including Glass Lewis & Company, made similar recommendations later in the day.
The decision by I.S.S. was something of a surprise, and a potentially big victory for the man who founded Dell in his college dormitory room 29 years ago and still has a 16 percent stake in the company. Mr. Dell and Silver Lake have been battling critics of the leveraged buyout offer, notably the billionaire investor Carl C. Icahn and the asset management firm Southeastern Asset Management, two big shareholders.
In its report, the proxy adviser argued that Mr. Dell and his partner were offering a significant premium for Dell’s shares, about 25.5 percent higher than where the stock was trading before word of the potential deal emerged. Perhaps more important, the takeover bid let shareholders sell their holdings to investors willing to shoulder the huge risks facing Dell as it tries to shift from making computers into the more lucrative corporate software and services business.
“The risk may be less that he’s taking all the upside for himself than that he is trying to catch a falling knife,” I.S.S. wrote of Mr. Dell. “From a public company shareholder’s perspective, if your C.E.O. is willing to buy your falling knife for the privilege of catching it, there is probably a price at which you should let him.”
Shares in Dell closed up over 3 percent on Monday, at $13.44. They had fallen on Friday amid expectations that Mr. Dell would not raise his offer, endangering the prospects of a deal.
The report by I.S.S., which is widely regarded as an influential voice in corporate elections — especially close ones, as Dell’s appears to be — may help sway investors on the fence about the offer. Its word doesn’t always prevail, however, as investors have sometimes ignored its recommendations.
Still, its views were considered important enough to have merited lengthy presentations to the firm by Mr. Dell; a special committee of Dell’s board; and Mr. Icahn and Southeastern. (Silver Lake did not participate in the meeting with I.S.S., according to a person briefed on the matter.)
Advisers to both the suitors and to the special board committee had assumed that I.S.S. would most likely be unfavorable to the deal, based on what they viewed as skeptical questions, according to people briefed on the matter.
Such was the worry about I.S.S.’s recommendation that the Dell directors encouraged Mr. Dell in recent days to consider raising his bid, according to people briefed on the matter. Mr. Dell decided to stay put, apparently awaiting the firm’s report before making his next move.
Mr. Dell has argued that the leveraged buyout would let him continue turning around the company, away from the harsh glare of quarterly earnings reports and skeptical analysts.
And the Dell directors have said that the buyout offer was the best choice for shareholders, after the committee had examined a plethora of other alternatives. Among them were potential moves that would have kept Dell publicly traded while paying out shareholders through either a big special dividend or a large stock buyback.
Mr. Icahn and Southeastern have argued that Mr. Dell’s bid significantly undervalued the company, and that the special committee unfairly discounted alternative proposals. The two investors, who own about 13 percent of the company, have instead pitched a plan under which Dell would buy back 1.1 billion shares at $14 each.
In its report, however, I.S.S. pointed to the brief emergence earlier this year of the private equity giant Blackstone Group as a potential rival bidder; Blackstone walked away after having viewed confidential information about the company’s business.
To I.S.S., the only real alternative to the leveraged buyout was leaving Dell alone, in that way having shareholders bear the risks of supporting a challenging transformation. Any recapitalization plan would add more risk to the company in the form of higher debt. The proxy adviser added that Mr. Icahn’s proposal carried additional risk, in that it required investors to vote out Dell’s existing board and elect an entirely new slate that he supported.
That extra uncertainty was not enough to justify an extra 2.6 percent in cash payouts, I.S.S. said.“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,” I.S.S. wrote.
The Dell special committee said in a statement that it was pleased by the proxy advisory firm’s conclusions. It added: “We also believe rejection of this transaction would expose Dell and its shareholders to serious risks and uncertainties that will harm the company’s business and erode shareholder value.”
Mr. Icahn and Southeastern were unmoved, and in a statement to fellow investors continued to urge a rejection of Mr. Dell’s bid.
“Southeastern and Icahn disagree with the I.S.S. voting recommendation issued earlier today, which did not appear to address fair value for Dell’s stockholders,” the two said.
But with I.S.S. and other advisory firms siding with Mr. Dell, it isn’t clear how much negotiating leverage Mr. Icahn has left.
Neither side believes that the fight is over, and the bitter war of words may continue until the eve of the shareholder vote, scheduled for July 18.
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