Even With Proxy Firms’ Backing, Dell Buyout Is No Slam Dunk
Now begins the final sprint. First reported in January, the marathon effort to take the struggling computer company Dell private in a $24.4 billion leveraged buyout by its CEO Michael Dell and the private equity firm Silver Lake has officially been blessed by three out of three proxy advisory firms ahead of a July 18 shareholder vote.
While Dell and Silver Lake can take some comfort in the endorsements of Institutional Shareholder Services, plus Glass Lewis and Egan Jones, the deal is probably still not in the bag, for several reasons. No matter how you look at it, there’s a pretty good chance that the vote could still be close.
So far, shareholders controlling about 18 percent of Dell’s proxy have openly declared and repeated their opposition to the buyout. Another large shareholder, Yacktman Asset Management, which owns about 14.9 million shares, amounting to about about 0.84 percent of the proxy, reiterated its opposition in a statement today.
Among other things, the firm said that the Dell-Silver Lake offer, which values the company at $13.65 a share, has been holding Dell shares back. When compared to rival company Hewlett-Packard, whose shares are up more than 80 percent since Oct. 31, Dell shares, it says, have risen by about half that. “Given current market conditions and comparable opportunities, the Dell/Silver Lake proposal is inadequate,” Yacktman said.
Where some are publicly willing to declare their opposition, there are likely to be more seething in silence. Glass Lewis estimates in its report that shareholders controlling about 20 percent of the proxy may be opposed to the buyout. That amounts to nearly half of the votes required to pass the deal.
Why is that? When the buyout process began, the special committee of Dell’s board overseeing the go-shop process established the rules of the game early: The company’s biggest shareholder — Michael Dell — must abstain from voting on a transaction that would ultimately give him control of the company. The same rules apply to Dell insiders, including its directors
and employees. That amounts to slightly more than 14.2 percent of the company. In this case, a majority works out to about 43 percent of shareholders.
Others may yet be swayed by the arguments of those shareholders like Yacktman, including the activist investor Carl Icahn, who say the deal undervalues Dell. Some on the fence will take an unpleasant bath on its shares at the buyout price of $13.65. Consider this: There are more than 140 institutional shareholders who own more than one million shares. Many, if not most, of those have owned the shares for two years or more. During that time, Dell’s share price peaked at $18.32 in February of 2012. Any firm that owned Dell shares on that date is underwater by about $4.7 million for every million shares they owned.
Many who have had longer positions will be taking losses bigger than that: Five years ago this week, Dell shares were trading at $22.31. Southeastern Asset Management, the Tennessee-based investment firm that until last month was Dell’s largest outside shareholder, started accumulating its holdings in 2005, a year during which Dell shares traded as high as $41.51 and no lower than $29.40.
On the flip side, many shareholders will be swayed either completely or in part by the opinions of those proxy advisory firms. Many index funds employ so-called “autopilot” policies. The largest of these include State Street Global Advisors, which has about 3.5 percent of Dell’s shares, and which gets some advice from ISS. Invesco’s PowerShares funds unit, which has about 1.2 percent of Dell shares, gets its advice from Glass Lewis.
The Wall Street Journal reported today that meetings between Dell and its larger shareholders are expected to continue this week. Many of those shareholders may decide that it’s better to get out of their Dell positions and transfer the risk associated with Dell’s turnaround strategy to Michael Dell and Silver Lake. Many will have to absorb losses, accepting that bets made years ago on the once high-flying king of the PC business didn’t turn out as expected. That will be a bitter pill to swallow, which is precisely why the vote to approve the buyout is going to be close.