Sunday, 10 March 2013

Mason Hawkins and Carl Icahn versus Dell

Outside shareholders upped their pressure on Dell's board of directors this week, arguing that the proposed go-private transaction is unfair to all shareholders not named Michael Dell.  Southeastern Asset Management’s Mason Hawkins, who has been arguing for several weeks that the deal being promoted by the board undervalues the company, sent a letter to Dell restating his case, and requesting information about Dell's shareholders, which will enable him to persuade other owners to join his cause.    

In the letter, Hawkins points out that the special committee charged with assessing the proposed transaction - and soliciting alternative offers - is composed of board members who themselves own very little of Dell’s stock, meaning that their interests may not be fully aligned with the interests of all shareholders.  In addition, he questions the fact that Dell has long argued that its sizable cash hoard was "trapped" overseas - since repatriating it would involve paying tax - yet is now using that very same cash to fund part of the buyout.  Further, Hawkins wonders aloud about the way management presented recent earnings results, and suggests that they were arranged in such a way as to emphasize the declining PC segment, rather than highlighting the rest of the business, which surely has a brighter future. 

Hawkins was joined by the formidable activist investor Carl Icahn, who reportedly owns up to 6% of Dell.  The significant size of his stake, combined with Icahn's experience and reputation engaging in proxy battles, adds immense weight to the growing list of dissatisfied outside shareholders.  It's unclear if their efforts are coordinated, but Icahn contends that Dell is worth around $23 per share, almost exactly the same number that Hawkins has put forth, and recommends a deal that is similar to one of the scenarios that Southeastern favors.  Icahn would like to see the company pay a special dividend of $9 per share, funded by a combination of cash, receivables and new debt.  In addition to the $9, ongoing shareholders would own a "stub" that could be expected to be worth nearly $14, based on Dell's cash flows.

But Icahn goes further than Hawkins.  If Dell shareholders vote against the go-private proposal, and if the company doesn't then implement his preferred deal, Icahn stated his intention to run a slate of directors who will.  In effect, the annual meeting where shareholders are given the choice between the two competing boards would amount to a vote between Dell's deal and Icahn's.  In a bold and clever move, Icahn pledges that he will personally provide financing, on commercially reasonable terms, which would allow for the prompt payment of a special dividend.  

Taken together, Hawkins and Icahn are making a multi-pronged attack on the go-private offer.  They make a sound business case that the proposed deal undervalues the company; they raise hard questions about the interests and fiduciary duties of the board, questions that will not fade away quietly as they proceed to rally the support of additional shareholders; by offering financing of his own, Icahn has pre-empted management, if they were planning to claim that the cash for a special dividend was unavailable; and management was reminded that matters that can't be settled agreeably in the boardroom can be settled disagreeably in the courtroom, as legal options remain available.

If reports of Icahn owning about 6% of the firm are accurate, then together he and Hawkins control 14-15% of the company, about the same proportion as Michael Dell.  It will be fascinating to watch which side prevails, though this writer's guess is that shareholders will not approve Dell's existing offer.  Whether the transaction that is ultimately agreed to is a sweetened version of the go-private deal, or a different transaction altogether, remains to be seen, however.

Sources: The letters referred to above can be found in Dell's SEC filings.

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