The Dell buy-out - Decision time

2013-07-23 09:18:33

Jul 23rd 2013, 7:45 by M.G.| SAN FRANCISCO

THE fate of one of the world's iconic tech companies is in the balance. On July 24th shareholders of Dell will be asked to vote on a proposed $24.4 billion management buy-out put together by Michael Dell, the company's founder, and Silver Lake, a private-equity firm. If the deal is approved, Dell will slip into the shadows of private ownership, where Mr Dell and his allies are betting they can revive its fortunes. If the transaction is vetoed, the outcome is likely to be a messy stalemate that will deepen Dell s woes.

The vote will be a close run thing. Initially due to take place last week, it was postponed by Dell s board when it became clear that Mr Dell and his supporters needed more votes to carry the day against Carl Icahn, an activist investor, and a bunch of investment firms such as Southeastern Asset Management, who believe that Mr Dell s offer is too low. Mr Icahn has floated a plan that would involve Dell retaining a stockmarket listing and taking on debt to pay those investors who wish to sell $14 a share for their holdings. He is also proposing to offer a warrant with a strike price of $20, for every four shares held.

Over the past few days Mr Dell and his pals have been working hard to win over investors who indicated last week that they intended to vote against the deal. They have also been urging shareholders who sat on their hands to participate in this week's poll because votes that are not cast are counted as no" votes. (The shares of Mr Dell, who owns 15.6% of Dell, are excluded from the ballot altogether.)

Some big investors have been deliberately sitting on the fence in the hope that Mr Dell and Silver Lake will sweeten their offer of $13.65 a share and there is still time for this to happen. But even if Mr Dell and his allies refuse to budge, there are several reasons why investors should support the plan they have put forward.

For a start, Mr Icahn s counter-proposal is hardly problem-free. Although he has come up with a financing scheme that offers a higher price for Dell s shares and maintains a public listing of its stock, he has yet to spell out a compelling strategic vision for the company or a concrete plan for achieving it. Moreover, to finance his plan, Dell would have to take on a considerable amount of debt. That could depress its share price if the market frets it will struggle to cope with the increased leverage.

Opponents of the buy-out group's offer point out that Dell was buying back shares last year at an average price close to $13.65. The implication is that the company felt its stock was undervalued at that price and therefore the buyout group s bid undervalues it too. But since the group's offer became public earlier this year, the personal-computer business, which still accounts for over 60% of Dell s profits, has been shrinking faster than many had foreseen. IDC, a research firm, reckons PC shipments fell by over 11% in the second quarter of 2013 and Microsoft recently implied it expects a mid-teens percentage decline in the third quarter. All this makes the buy-out group s offer look more reasonable.

Dell s shareholders also need to bear in mind that Mr Icahn s proposal will not automatically win the day even if Mr Dell and his supporters lose this week s vote. The chances are that a no vote will plunge Dell into a nasty bout of boardroom infighting, as Mr Icahn tries to replace the company s current directors with his supporters and Mr Dell's camp resists such attempts.

A prolonged proxy war would paralyse decision-making at Dell just when it needs to react faster than ever to structural shifts in the computing industry. One investment bank has already forecast that the firm s share price, which closed at just over $13 on July 23rd, could tumble to $9 should such a war break out. The offer put forward by Mr Dell and Silver Lake is certainly better than consigning Dell to litigation hell.