Dell Deal DOA?

The wires were flooded last week with coverage of Michael Dell’s move to buy back his namesake, Dell Computer. Wall Street looked at the deal as a fait accompli. Little did anyone suspect that the proposed $2.4B LBO might unravel. Or that the powers-that-be weren’t necessarily in control.

In fact, Dell common shareholders have filed several suits to block the transaction. And for a change, they’re actually being heard.

“This deal is so compellingly unfair to shareholders that I don’t know where to begin,” said Richard Pzena, chief investment officer at Pzena Investment Management, which held 14 million shares as of Sept. 30. His firm values Dell at about $25 a share, so the $13.65-a-share buyout offer is hardly satisfying, especially in light of how rich the deal economics work out for Michael Dell and his LBO friends.

Dell and Silver Lake could earn a 25%-plus annual return over five years, turning $5.85 billion of equity into about $20 billion. So who can blame Mr. Prenza? To his credit, he has been unrelenting: “There’s little reason for Dell to go private. If anything, a private Dell with sizable debt would have a harder time completing its transition from a PC-focused company. There’s no logic for this deal other than greed.”

Michael Dell counters by saying that he needs the freedom  –“the latitude”– to reshape his company without all the bottom-line pressures that dog publicly traded companies. He wants time to execute his vision. And that ought to be fine, as should a reasonable buy out offer for his shareholders.

In another shareholder led lawsuit –one that seeks class action status—it is alleged that the buyout has been timed to take advantage of the company’s depressed stock price (down 22%). “By engaging in the going-private transaction now, in the midst of its transition from being a PC vendor to a full service solution provider, Dell’s board is allowing defendants (Dell and Silver Lake) to obtain Dell on the cheap.”

Michael Dell is already worth $15 billion. If the deal goes through, Dell would contribute his 14 percent stake along with an undisclosed amount of cash. MSD Capital, Michael Dell’s New York-based investment company, would also contribute an undisclosed amount of cash. Silver Lake and Microsoft are down for $1 billion and $2 billion respectively, and a host of banks would put up $15 billion more.

That Wall Street genuinely didn’t see this coming is noteworthy. Because the fact is, investors were calling out Michael Dell for breaching his fiduciary responsibility even before he announced his desire to do this buy-back. Of course, that doesn’t necessarily mean that Mr. Dell is guilty of anything, but it is reassuring to know that a bunch of angry common shareholders can find an audience, even if Wall Street analysts aren’t among them.

Source: Wire Services

—Tom Finn

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