Arik Hesseldahl

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Michael Dell and Silver Lake Plan to Stand Pat on Buyout Bid

stand-Pat-featureMichael Dell and private equity firm Silver Lake are determined to hold steady and will not capitulate to pressure from Carl Icahn and other shareholders in the struggling computer maker Dell to raise their offer to take the company private in a leveraged buyout.

According to sources familiar with the most recent conversations held among the group of investors, Dell and Silver Lake are “prepared to see the deal blow up” rather than raise their bid of $13.65 a share.

The possibility that the buyout proposal will fail a vote of shareholders, still scheduled for Thursday morning, increased today as reports emerged that investment firm BlackRock made it known that it intends to vote against it. That makes more than 21 percent of shareholders publicly opposed to the deal, nearly half of the majority needed to approve it.

Michael Dell and Silver Lake are unwilling to raise their bid in light of the declining state of the company’s PC-centric business. A failure of the buyout proposal would raise the prospect of a contentious and extended proxy fight for control of the company that could go on for months, an eventuality that Michael Dell is said to be prepared for, according to a person familiar with his thinking on the matter.

If the buyout deal collapses, Dell’s special committee had argued that the share price, currently buoyed by the buyout offer price, would collapse and Dell would trade at a valuation more in line with that of Hewlett-Packard, which implies a share price for Dell of between $5.85 and $8.67 a share.

One key consideration, said a person familiar with the discussions, is that borrowing costs have gone up since Silver Lake first started the process of negotiating the terms of its offer with Dell’s board of directors last year. The final bid of $13.65 a share came only after Michael Dell added some of his own shares in the company into the financing picture at a discount. Silver Lake already considered itself “tapped out” with its prior bid of $13.50, and is unwilling to revisit the terms of its debt financing package.

Michael Dell and Silver Lake are, as one source put it, “strongly aligned” in their unwillingness to raise their joint bid, even if the vote scheduled for Thursday is delayed.

On top of that is the collapse of the personal computer business from which Dell still derives roughly 70 percent of its revenue. Earlier this month, research firm Gartner reported that the global market for PCs declined by 11 percent from the year-ago period, marking a record fifth consecutive quarter of declines. The state of the market is declining faster than Silver Lake’s initial models called for when the deal was first conceived.

Dell’s profitability has declined considerably in the last year as the PC industry has contracted. In its most recent quarter, its earnings per share were seven cents, or more than 80 percent lower than the 36 cents in the year-ago period.

Another consideration is the fact that if the buyout is approved, Dell shareholders of record will receive their regular quarterly dividend payment of eight cents a share. This plus two previous quarterly dividends paid after earlier quarters raises the total payouts by the company to shareholders of record to $13.89 if the deal doesn’t close before Sept. 26. Sources expect the buyout, if approved, won’t close before October.

Dell shares closed down 13 cents, or nearly one percent, to $13.02 during the regular session and fell further after hours to $13 even.

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