Carl Icahn Plays New Card in Dell Buyout Battle
Two days after Institutional Shareholder Services and two other proxy advisory firms endorsed a $24.4 billion leveraged buyout proposed by Michael Dell and the private equity firm Silver Lake, Icahn today urged shareholders to invoke a provision of Delaware law that allows them to have second thoughts up to 60 days after the buyout has taken place.
I’m not an expert on the legal nuances here, but, technically speaking, here’s what’s going on. If shareholders approve the buyout, then the current Delaware corporation that is Dell Inc. would be acquired by a new entity called Denali, controlled by Dell and Silver Lake, that would take its name. That makes the buyout a merger.
Under Delaware state law, a venue where Icahn has already suffered some legal setbacks on the Dell front, shareholders who don’t vote in favor of a merger that has already taken place have the right to ask the courts to determine the value of their shares in a company by way of appraisal. The right exists for 60 days after a merger closes. Icahn is betting that even if the buyout proposal is approved, if enough shareholders invoke their appraisal rights, they may get a payout settlement from Dell later.
If a large number of shareholders do this, Icahn said, it exposes Dell and Silver Lake to a potentially $750 million penalty, which amounts to a “material change” in the financing terms. “We would certainly like to be present to hear the discussion between Michael Dell/Silver Lake and their lenders as they consider the impact of a substantial exercise by stockholders of their appraisal rights,” Icahn said in a statement, which you can read in full below.
Icahn’s move can’t help but look like a tactic intended to sow some doubt and create some kind of delay to the deal closing. There are only eight days remaining before the July 18 shareholder vote on the buyout. In practice, appraisal rights rarely end up before the Delaware courts, but the fact is that the vote is expected to be close, despite the endorsements of the proxy firms.
Icahn and other shareholders have made their case numerous times about why they oppose the buyout, which values Dell at $13.65 a share. They argue that the company is worth more, and that shareholders should have a choice to stay invested in the company and reap the rewards of an eventual turnaround, rather than let Michael Dell and Silver Lake take all the profits should it be successful.
One key problem with his argument is around Dell’s current valuation. Right now, Dell shares are trading at a price that is being artificially buoyed by the $13.65 buyout bid, trading in the range of $13.20 to $13.45 a share recently. Without that, there’s a pretty good case to be made, at least in the opinion of Dell and the special committee of its board, that the shares would be trading in the $5 to $8 range.
The July 18 buyout vote could still fail. And that would trigger an extended and likely ugly battle for control of the company that could play out in many ways.
No comment yet from Dell’s special committee, though I do expect one. Dell shares have barely moved on the news, up a penny to $13.37, suggesting that those paying attention have kind of made up their minds. We’ll see for sure next week.
Here’s Icahn’s full statement:
Dear Fellow Dell Stockholders:
We are in the process of perfecting our right to seek appraisal of our Dell shares and we believe that you should also perfect your appraisal rights. Under Delaware law if a merger occurs and you did not vote for it, you are entitled, through appraisal, to the fair value of your shares as determined by a Delaware court. We have done a great deal of due diligence concerning the value of Dell, and as we have said in the past, we believe the $13.65 merger price substantially undervalues your Dell shares, and we believe if you seek appraisal, you will receive more. BUT WHAT IS MOST IMPORTANT ABOUT SEEKING APPRAISAL IS THAT YOU CAN CHANGE YOUR MIND ABOUT APPRAISAL UP TO 60 DAYS AFTER THE MERGER AND STILL TAKE THE $13.65 PER SHARE. During the “free 60 day period” we believe Dell may wish to negotiate with those that sought appraisal and possibly pay a premium over $13.65 to get them to settle and drop their appraisal claims, as explained below. To add a new twist to an old saying, “you can have your cake and eat it too”.
Those Who Seek Appraisal May Get Lucky
In many merger transactions, if over a certain number of stockholders seek appraisal rights, this gives the purchaser the right to opt out of the transaction and thereby avoid the uncertainty created by appraisal. However, Michael Dell and Silver Lake did not obtain this opt out right. This leaves Michael Dell and Silver Lake VERY exposed. Because they neglected to obtain this right, no matter how many stockholders seek appraisal, if the merger is approved, Michael Dell and Silver Lake are obligated to close or pay a $750 million penalty. We would certainly like to be present to hear the discussion between Michael Dell/Silver Lake and their lenders as they consider the impact of a substantial exercise by stockholders of their appraisal rights. Will the lenders use this as an excuse to refuse to close claiming this is a material adverse change, especially in light of the terrible time Dell is having in the PC market as so often stated by Dell themselves? We think that there is a good chance that none of them will want to face the overhang of a large number of stockholders seeking appraisal. I therefore believe there will be significant pressure on Michael Dell and Silver Lake to resolve the appraisal rights, and possibly seek a settlement during the “free 60 day period”. Even if you want the Michael Dell/Silver Lake offer to be accepted, unless you believe your shares will tip the balance, why vote for it? Why not seek appraisal and have the benefit of the “free 60 day period”? Dell may well pay a premium over $13.65 to settle with those seeking appraisal.