Dell Buyout Near Collapse as Board Committee Rejects Sweetened Offer
The proposed leveraged buyout of the computing company Dell appeared close to a collapse today after the special committee of the company’s board of directors rejected a revised offer that Michael Dell and the private equity firm Silver Lake made to buy out the company last week.
The special committee of the company’s board said in a letter made public in a filing with the U.S. Securities and Exchange Commission (full text below) that it refused to alter the conditions of the shareholder vote that counts non-votes the same as no votes.
That sets up a circumstance where 25 percent of shareholders who oppose the buyout, combined with 27 percent of shareholders who have, for one reason or another, not voted at all, add up to a majority of 47 percent. Since in this case a 43 percent majority is all that’s needed — Michael Dell is not allowed to vote his 14 percent of shares — the combination of dissident shareholders, including the activist investor Carl Icahn and non-voting shareholders, will kill the buyout deal.
Dell and Silver Lake had offered $13.75 a share to buy the company out, an increase of 10 cents per share over their previous price, raising the value of the proposed buyout to $24.6 billion. Dell and Silver Lake had requested that the special committee change the rules of a shareholder vote, providing that non-votes are the equivalent of no votes.
In its letter, signed by Alex Mandl, a Dell director, the committee instead suggested that Dell and Silver Lake simply raise their bid without conditions. The committee would then be willing to change the record date establishing eligible shareholders. “The Committee is not prepared to accept your proposal. We are, however, willing to establish a new record date for a vote on a $13.75 per share transaction under the existing voting standard,” the letter reads.
Sources familiar with the thinking of people in the Dell-Silver Lake camp say the investor group is unwilling to budge, and don’t view the committee’s latest proposal as meaningful. Instead, they’re more likely to stick with their original $13.65 bid, and let the chips fall where they may at a vote of shareholders now scheduled for Friday.
Dell and Silver Lake had been concerned about the low turnout rate of voting shareholders. So far, 27 percent of Dell shareholders have not cast a vote. Some have no reason to, because they have sold their shares since the June 3 record date. Some Dell shares are in the hands of sovereign wealth funds that do not vote on proxy matters. Others are in the hands of brokerage accounts managed on behalf of wealthy individuals, who also tend not to vote on proxy matters. Another block of shares — estimates put this number at about 10 percent — are ordinary retail investors who may be opting not to vote, or who may not even know that a vote is being held.
The potential collapse of the buyout process sets up a scenario where Icahn, the second-largest shareholder in the company, could launch a protracted proxy fight for control of the company in an attempt to carry out his proposed recapitalization. In that event, Michael Dell would be allowed to vote his proxy, and thus prevent Icahn and his supporters, including the investment firm Southeastern Asset Management and others, from winning control of the company’s board.
That sets up the prospect of a mixed board of directors with divided loyalties, and a messy, difficult path forward for the company. No surprise, then, that Dell shares are falling this morning; as of 10:45 am ET, shares are down by more than three percent, to $12.43.
Here’s the letter from Dell’s special committee to Michael Dell and Egon Durban, managing partner at Silver Lake:
July 30, 2013
Mr. Michael S. Dell
One Dell Way
Round Rock, Texas 78682
Mr. Egon Durban
Silver Lake Partners
9 West 57th Street, 32nd floor
New York, NY 10019
Dear Mr. Dell and Mr. Durban:
The Special Committee has carefully reviewed your letter of July 23, 2013, in which you propose to increase your offer to $13.75 from $13.65 per share subject to the Committee agreeing to change the voting standard such that non-voting shares are no longer the functional equivalent of no votes in determining the majority of disinterested shares.
The Committee is not prepared to accept your proposal. We are, however, willing to establish a new record date for a vote on a $13.75 per share transaction under the existing voting standard. A new record date would enable the many shareholders who bought their shares after June 3, 2013 to vote on the transaction while giving all shareholders more time to reflect on where their best interests lie in light of the improved offer.
In the alternative, we are prepared to proceed with a vote on the existing $13.65 per share transaction at the Special Meeting to be reconvened on August 2, 2013 at 9:00 a.m. Central Time.
We look forward to your response.
THE SPECIAL COMMITTEE OF THE
BOARD OF DIRECTORS OF DELL INC.
Alex J. Mandl