Why Carl Icahn’s Latest Move on Dell Isn’t the No-Brainer He Says It Is
Carl Icahn, the billionaire activist investor who has hounded Dell throughout its attempt to go private in a $24.4 billion leveraged buyout, said yesterday that he saw what he calls a “no-brainer” opportunity for Dell shareholders.
Those who oppose the buyout of the company proposed by Michael Dell, the founding CEO, and the private equity firm Silver Lake, can, as he put it in a letter to shareholders yesterday, “have their cake and eat it too” — by opting not to vote for the buyout and by exercising their rights to have the company appraised within 60 days after the buyout closes.
If the buyout is approved, they’ll get their payout of $13.65 a share, plus a chance to reap an additional reward later if the court finds the company is worth more than that. “If you own Dell and opt for appraisal rights, you have a rare opportunity to make a profit without taking risk,” he told fellow Dell shareholders.
There are three reasons that he’s wrong, two of which he has acknowledged, and one he has as yet ignored completely.
First: Icahn assumes that a Delaware judge would find more value in Dell than what Michael Dell and Silver Lake have offered. Argue what you will about Dell’s other business units, the fact is that it is still about 70 percent exposed to the personal computer industry, which just clocked its fifth straight quarter of market declines. Dell shares, left to float on their own without the buyout bid, and valued similarly to rival Hewlett-Packard, could easily trade for about half the buyout price, plus or minus a couple of dollars.
Icahn said that, historically, companies facing appraisal rights cases in Delaware courts settle with those shareholders who bring them. But Dell could just as easily gamble on the outcome and argue, as it did in a presentation to shareholders last week, that there’s no additional value to be found. At best, it’s a crapshoot.
Second: Even if the case proceeded, those shareholders bringing an appraisal case would have to go to the time and expense to fight it. And, in the end, the judge could just throw the whole thing out. In a previous Delaware case in June, a judge ruled from the bench that Icahn’s claim that the Dell go-shop process wasn’t fair should be tossed out.
Third: Probably the biggest flaw in Icahn’s appraisal rights tactic is that, for it to work, the buyout deal must first be approved. That means that about 43 percent of shareholders — excluding Michael Dell — have to vote in favor of the deal. (Under the rules of the go-shop process, a non-vote is equivalent to a “no” vote.) But in order to exercise your appraisal rights, you must not vote for the deal.
That raises the risk that the buyout doesn’t get approved. Without a buyout, there’s no appraisal case, no initial payout, and no chance to get paid a second time in the unlikely event that the case proceeds to a conclusion. Where Icahn argues that there’s a chance to “have your cake and eat it too,” there’s a very real prospect that the cake doesn’t get baked at all.
Dell’s special committee pleaded with shareholders in a filing with the U.S. Securities and Exchange Commission late Thursday: “… if a sufficiently large number of shareholders seek appraisal and thus do not vote in favor of the acquisition (which is required to pursue appraisal rights), the merger agreement will be terminated, the merger will not occur, stockholders will not have the opportunity to receive the $13.65 per share cash merger consideration, there will be no appraisal rights, and stockholders will continue to bear the risks of holding their Dell shares.”
If that happens, the scenarios aren’t pretty. Icahn would move to launch his $14-a-share offer to buy up to 72 percent of Dell shares and leave the rest as a publicly traded stub. (He promised yesterday to sweeten this offer with warrants to buy more Dell shares in a forthcoming filing today.)
Implied in that tender offer is the prospect of a proxy fight that could drag on for months, if not longer. Dell’s board would likely morph into a muddled mix of directors with competing loyalties to Icahn or to Michael Dell. But if the tender offer were to succeed, the founder would have the chance to end up controlling more than 40 percent of the company’s shares, and could simply bide his time until he could move to retake control. There’s no telling exactly what Dell shares might do in response to the turmoil, but it’s hard to see a scenario where they rise.
For Dell shareholders, it’s also pretty hard to call this a no-risk move.