Icahn and Southeastern proposed an alternate transaction to Dell’s proposed $24.4 billion go-private transaction with the private equity firm Silver Lake. The board committee responded by saying it wanted more information in order to evaluate. Aside from some chatting to a CNBC anchor about wanting to fire Michael Dell as the company’s CEO, and nominating a slate to replace the company’s current board of directors, the Icahn-Southeastern camp has been quiet.

Icahn and Southeastern proposed their transaction before Dell reported quarterly earnings on May 16. That earnings report showed a 79 percent year-on-year drop in quarterly profits.

The committee last week asked the Icahn camp for details about how it would finance its proposed deal, and for a draft of a definitive agreement. Icahn has in recent weeks disclosed that he owns about 4.5 percent of Dell’s outstanding shares, while Southeastern has long been Dell’s largest outside shareholder, accounting for more than 8 percent.

First off, Dell has moved up the date of its report. Originally set for May 21, the results will come after markets close in New York today and a conference call with analysts will start at 1:45 pm PT.

The reason for the change likely has a lot to do with the fact that Dell is probably going to report another miss on its consensus numbers. Analysts polled by Thomson Financial expect Dell to report a 35 cent per-share profit on sales of $13.5 billion. But as The Wall Street Journal reported Monday, Dell expects to announce profits of about 20 cents on $14 billion in sales, a huge bottom-line miss.

It’s difficult to expect much else. Despite all the efforts made in recent years to nudge Dell in the direction of becoming a more enterprise-focused company via acquisitions in the areas of cloud computing, software and services, Dell still derives about 70 percent of its sales, give or take, from consumer or commercial PCs or PC-related accessories like monitors. And as we all know, PC sales are plummeting at a historic rate.

That’s not to say there aren’t potential bright spots. CEO Michael Dell has been crowing about the company’s success in server sales and has described market share losses by rival Hewlett-Packard as “staggering.”

Then, of course, there’s the ongoing saga of Dell’s quest to go private in a $24.4 billion buyout transaction with Silver Lake Partners. Carl Icahn and Southeastern Management, which between them control about 13 percent of Dell shares, are opposed and this week made their own counter-offer, and then nominated a slate of directors to replace Dell’s current board. Icahn has made no secret that he’d like to send Michael Dell packing. The special committee of Dell’s board overseeing the buyout process has asked the Icahn camp for more information.

Certainly there will be questions for management about all of it, though the answers from Dell management will probably be some variation of “no comment.”

That has started to change. Boards worried about their scant digital expertise are scrambling to recruit newcomers who can advise management on strategies for mobile devices, social media and data analytics.

Read the rest of this post on the original site »

Icahn on Friday unveiled a joint proposal with Southeastern Management, Dell’s largest outside shareholder, that would give Dell shareholders the option to continue holding shares in the company, and take an additional $12 a share in cash or stock. The offer came as an alternative to a $24.4 billion leveraged buyout proposed by Dell founder and CEO Michael Dell and the private equity fund Silver Lake Partners.

The board’s special committee asked Icahn and Southeastern to spell out specifics of its plans for Dell, and questioned whether or not the proposal was a serious one.

“It is not clear to us whether you intend to formulate your transaction as an actual acquisition proposal that the Board could evaluate and potentially endorse or accept or rather to propose it as an alternative that the Board could consider in the event the pending sale to Silver Lake and Michael Dell is not approved,” the committee said in its letter, which you can read in full below.

In the letter, Dell’s committee also asked Icahn and Southeastern to spell out financing terms — the plan calls for taking on a lot of debt — and how it would provide cash to keep the company running after using up much of Dell’s pile of cash to pay shareholders.

Icahn owns a stake in Dell that amounts to about 4.5 percent of shares outstanding, and Southeastern owns about 8 percent. They’ve both been pretty critical of the Dell-Silver Lake proposal. In televised comments on CNBC Friday, Icahn said that Dell’s existing shareholders will “literally get screwed” by the deal, which values Dell at $13.65 a share. Southeastern has previously described the Dell-Silver Lake buyout plan as “inadequate.”

The other shoe expected to drop today on the Dell front will also come from the Icahn camp. Icahn said he plans to nominate a new slate of Dell directors, and that the list would be made public today. It will be interesting to see whose names are on it.

Dell shares were indicating they would open lower this morning in premarket trading. As of 8:23 am ET, Dell was trading down four cents from Friday’s close, to $13.41.

Anyway, here’s the latest letter:

May 13, 2013
Mr. Carl C. Icahn
Icahn Enterprises L.P.
767 Fifth Avenue, 47th Floor
New York, NY 10153

Mr. G. Staley Cates
Southeastern Asset Management Inc.
6410 Poplar Avenue, Suite 900
Memphis, TN 38119
Icahn/Southeastern Proposal

Dear Mr. Icahn and Mr. Cates:

We have received your letter dated May 9, 2013, addressed to the Board of Directors of Dell Inc. (“Dell” or the “Company”), in which you outline a potential transaction in which the Company’s stockholders would be entitled to elect to receive either $12.00 per share in cash or $12.00 in additional shares (based on a value your letter assumes to be $1.65 per share) for each share currently held, in addition to retaining their current shares.

It is not clear to us whether you intend to formulate your transaction as an actual acquisition proposal that the Board could evaluate and potentially endorse or accept or rather to propose it as an alternative that the Board could consider in the event the pending sale to Silver Lake and Michael Dell is not approved. In order for the Special Committee of the Board of Directors of Dell to evaluate the transaction you have proposed and potentially negotiate terms which could cause it to constitute a Superior Proposal within the meaning of the pending Merger Agreement, we would need certain clarifications and additional materials, as set forth below.

Please provide a draft of the definitive agreement pursuant to which the transaction would be effected. The Special Committee needs to understand the full terms and structure of the transaction, the extent to which it would be conditioned upon future events and actions, and the remedies that would be available to the Company and its stockholders if the transaction is not consummated.

Please provide comprehensive information regarding the proposed financing for the transaction. We need to understand the terms of the debt financing, and contingencies available if cash on hand or stockholder rollovers are less than anticipated. We would also need to see drafts of forms of commitment papers (and any proposed bridge facility) so that we can assess the certainty of closing.

Please indicate the counterparty and terms of the proposed receivables sale or financing and provide a draft of form of commitment letter or purchase agreement applicable to this proposed sale or financing.

Please describe any contemplated arrangements to provide working capital or other liquidity following the closing. Your proposal does not appear to take into account the additional borrowings that would seem to be required to address the liquidity needs that would result from the extent to which you would use the Company’s cash in the transaction and the fact that you would sell accounts receivable, which would have the effect of reducing future cash flows. In addition to working capital, the Company is likely to have other significant cash needs, such as approximately $1.7 billion of debt maturities within approximately 12 months after closing.

Your proposal assumes that holders of at least 20 percent of Dell’s shares will elect to receive distributions in the form of additional Dell shares. Please provide the forms of commitment letters pursuant to which your affiliated entities would commit to elect to receive additional shares. In addition, please indicate whether you would obtain similar commitments from holders representing an additional 8 percent of Dell’s shares (we note, based on your Schedule 13D filings, that your affiliated entities have investment discretion over approximately 12 percent of Dell’s outstanding shares). If you would not obtain such commitments, please indicate as noted above, the source of the additional cash needed to fund cash distributions in respect of these shares.

Please provide your analysis as to whether the receipt of additional shares by stockholders electing to receive share distributions will be taxable to those stockholders.

Please identify the persons you would expect to form the senior management team of Dell following the transaction, and what role these persons would play in arranging the financing for the proposed transaction. Also, please provide us with a description of the strategy and operating plan you would expect this management team to implement. This information is important both to our assessment of the value of the proposed equity stub and to an evaluation of the financing and completion risk for a highly leveraged transaction of the kind you propose.

Please provide the form of any shareholder agreement, or any pertinent term sheet, governing the relationship between the Icahn and Southeastern affiliated entities so the Special Committee can better understand how decisions relating to the transaction and the Company would be made following the signing of a definitive agreement and following closing of the transaction.

If you have questions about the requested information, please contact Roger Altman, Will Hiltz or Naveen Nataraj at Evercore Partners.

Very truly yours,

The Special Committee
of the Board of Directors
of Dell Inc.

Taking to CNBC’s airwaves in another one of his candid phoned-in afternoon rants (the last was an epic 28-minute on-air slugfest with hedge fund investor Bill Ackman in January) with host Scott Wapner during the closing half hour or so of the network’s “Fast Money Halftime Report” show, Icahn revealed that on Monday he will nominate a slate of 12 new directors and, if successful, he’ll see to it that Michael Dell doesn’t remain CEO. “He will not be running the company,” Icahn said.

“It’s not that I have anything against [Michael] Dell. I’m sure he’s a very nice guy,” Icahn said. “But it’s a new world out there.”

Icahn has had a busy day on the Dell front. First he reported in a filing with the U.S. Securities and Exchange Commission that his stake in Dell amounts to 4.52 percent. He also joined Southeastern Asset Management, Dell’s largest outside shareholder, in making a joint bid for the company. (The Wall Street Journal’s Moneybeat has the full text of the joint Icahn-Southeastern letter to Dell’s board here.)

The special committee of Dell’s board has in the last several minutes issued a statement saying it is “carefully reviewing” the Icahn-Southeastern offer.

“Mr. Icahn and Southeastern have outlined a potential leveraged recapitalization transaction that they want the Dell Board either to recommend at this time or to consider if the existing going-private transaction is rejected by Dell shareholders. They have also proposed replacing the Board with a slate of new directors who they say would approve such a transaction. Consistent with the Special Committee’s goal of achieving the best possible outcome for all shareholders, we and our advisors are carefully reviewing the potential transaction to assess the potential risks and rewards to the public shareholders.”

In his televised jeremiad, Icahn blasted Dell’s board and said that Dell shareholders will “literally get screwed” by the $24.4 billion Michael Dell/Silver Lake offer to take the company private in a leveraged buyout. His offer, he said, would leave existing shareholders with a publicly traded stub that would allow them to make more money than the $13.65 per share Dell and Silver Lake have offered.

Below, two video highlights. The second one focuses more on Wapner’s fascination with Icahn’s opinion of the legendary Wall Street short-seller Jim Chanos, who has previously publicly stated that he has been shorting Dell shares. “I’ve made a lot of money going against Chanos,” Icahn said.

Of course it goes without saying that all the attention on Dell caused the shares to trade upward during the half hour or so that Icahn was on CNBC. Ahead of 1 pm ET, Dell shares were trading as high as $13.51, or up more than 1 percent. After Icahn hung up (and apparently called BloombergTV to make a similar on-air speech), its price settled back down. Here’s a screen grab I took of Dell’s share price via Yahoo Finance.

In November, when Paul Otellini announced his surprise retirement, I pointed out in a piece covering all the major contenders to succeed him, that every Intel CEO since Andy Grove was COO first. Krzanich will be Intel’s sixth CEO.

And while a lot was made of the fact that Intel’s board of directors was willing to look outside the company, and a lot of people rooted for Intel to name an outsider to run it, the board, led by its chairman, longtime Intel CFO Andy Bryant, decided to stick with established practice.

It’s not as though outsiders were not considered. I’ve heard reliable chatter that the headhunter Intel hired reached out to several people who turned the opportunity down. They include: Oracle President Mark Hurd; VMware CEO Pat Gelsinger, an Intel veteran once considered a likely successor to Otellini, but who was recruited away by EMC CEO Joe Tucci; and Michael Daniels, the former head of IBM’s services business, who retired on March 31.

Krzanich was promoted to the COO job in a surprise shake-up last January. He had run worldwide manufacturing, and as COO he took over some IT and human resources functions that had previously belonged to chairman Bryant. He joined Intel in 1982, and has been an on-the-ground plant manager at Intel’s complex in Arizona. During 2001-2003, he oversaw a complex transition in Intel’s manufacturing technology across its entire global footprint of factories.

Patrick Moorhead, head of research firm MoorInsights, said Krzanich’s naming is a deliberate signal that at a high level much of its strategy will remain the same: “The strategy that has kept Intel running for the last 20 years will remain unchanged: Fab first.”

That means that Intel’s factories — the sprawling multibillion-dollar facilities known in chip industry lingo as “fabs” — will continue to be filled in the most efficient way possible. Intel is at its core a manufacturing company, and is indeed one of the few major chip suppliers left — Samsung is another — that owns its own fabs.

Since they’re so expensive to build, and equally expensive to equip, and since they need to be retooled every few years, Intel’s business model is probably one of the biggest exercises in managing depreciation over time.

The move is also a signal that pushes back against the people who have argued that Intel needs a strategic shake-up. At a moment when PC sales are sliding at a historic rate in favor of tablets and smartphones, Intel has largely been absent from those markets. So it’s no surprise that Intel’s earnings results have suffered in recent quarters.

Meanwhile, phone makers and tablet makers have been using chips from companies like Qualcomm, Broadcom and Nvidia that use designs licensed from the British firm ARM Holdings. ARM-based chips are in practically all the world’s smartphones. Apple uses them in the iPhone and iPad, and they appear in most Android-based phones and tablets, as well.

As Mike Bell, head of Intel’s mobile chip operations, told me in an interview at D: Dive Into Mobile in New York last month, the company has made some strides in the mobile space, landing its chips in some phones and tablets, but they haven’t caught on in huge numbers yet.

There’s another important signal to consider. Renée James, the head of Intel’s software business, was named president. She has been chairman of the McAfee division that Intel acquired when it bought out that security software company last year, as well as of Wind River Systems, another software acquisition. For several years she has also been Intel’s point person in its dealings with Microsoft. While she was officially mentioned as a contender to be CEO, she is, at 48, still in contention for the post. She also sits on the boards of Vodafone and VMware, and for a time was Andy Grove’s chief of staff. (And, as I like to point out for fun, like me, she’s a University of Oregon graduate, and finished her MBA there the same year I was wrapping up my BA.)

But James’s elevation to president also sends an important signal about the rising importance of software at Intel. While Intel is at its core a manufacturing company, it has recognized the importance of software and acted accordingly. As Moorhead put it: “Intel once said it is the third-largest software company in the world, and I can’t prove, but I believe it. Intel is sending a really important message here. It sees software as where the puck is going.”

In a very brief press release, Dell said Breyer notified the company that he doesn’t intend to stand for reelection at the meeting.

That’s when Dell shareholders will be voting on a controversial $24.4 billion plan hatched by CEO Michael Dell and the private equity firm Silver Lake to take the company private in a leveraged buyout. Breyer’s vote on the matter will likely be among his final acts as a Dell director. Breyer had served on Dell’s board since 2009.

“Dell and its stockholders have benefitted greatly from the leadership and perspective Jim has provided during his tenure on the Dell board,” Michael Dell said in the statment. “We’re grateful for his guidance and we wish him well in all his future endeavors.”

This is Breyer’s third resignation from a high-profile director’s seat in recent days. Only three days ago, Facebook said in a filing with the U.S. Securities and Exchange Commission that Breyer would be stepping down from its board, a position he has held since 2005. And last week, Walmart announced that Breyer would “rotate off the board in accordance with our corporate governance guidelines” after June 7.

He still sits on the boards of video company Brightcove and also of News Corp. (which is, of course, the parent company of AllThingsD.)

Kennelly is the latest executive from a publicly traded company to join the board of Nimble. In July, Frank Calderoni, CFO at networking giant Cisco Systems, joined Nimble’s board, as well. Also on its board are Kirk Bowman, a former executive at Dell unit EqualLogic and also of VMware, Ping Li of Accel and Jim Goetz of Sequoia.

Nimble last fall closed a $40.7 million mezzanine round of venture capital funding led by Sequoia Capital and Accel Partners, and has raised a combined $98 million. Other investors include Lightspeed Venture Partners, Artis Capital Management and GGV Capital. The implied valuation is said by people familiar with the matter to be between $650 million and $700 million. I doubt it will be long before people start whispering about IPO plans, if they aren’t already.

The company said in February that it had reached a $100 million run rate in bookings for the fiscal year ended Jan. 31.

Nimble is seen right now as one of the important up-and-coming storage companies to watch among the people I talk to who follow these things. I talked last week with CEO Suresh Vasudevan, who told me that Nimble asks a pretty fundamental question about enterprise storage: Why keep backup storage separated from other storage? Every time you move your data to another storage medium, there’s an extra step, one that Vasudevan argues isn’t necessary.

The company builds storage arrays that use a unique architecture called CASL, or Cache Accelerated Sequential Layout. I won’t go into the technical weeds, but the basic idea is that the arrays use integrated flash memory not as a separate tier to speed things up, but as part of the basic design. It’s essentially a hybrid that brings together flash and spinning hard disks, and takes advantage of the unique properties of both. The end result is that many customers are able to reduce the amount they invest in storage hardware. It has so far shipped 2,000 systems, and has more than 1,100 customers.

As it happens, the report came a week before chipmaker Intel is due to report quarterly earnings on April 16. In a research note today, Stacy Rasgon of Sanford Bernstein sized up its prospects for the quarter and the rest of the year.

There’s a chance that the actual on-the-ground results may yet be worse than what the research firms detected. Relying on data from Taiwanese notebook manufacturers including Compal, Quanta and Wistron, sales were down in the first quarter by more than 18 percent, worse than the 11 percent to 13 percent drop reported by Gartner and IDC.

So what does that mean for Intel, the world’s largest supplier of computer chips and long considered an important bellwether of the overall tech economy? Nothing good, Rasgon argues. He expects Intel to report revenue of $12.43 billion, nearly $200 million below the consensus expectation of $12.6 billion. He expects earnings on a per-share basis to be 41 cents.

“Given the recent atrocious PC numbers, we believe investors may not be hugely surprised by weak outlook at this point (at least, they certainly shouldn’t be now),” he wrote.

Other key questions for Intel: Who will be the next CEO? And will Intel say anything about it on the conference call after earnings are announced? If you haven’t been keeping track, here’s a good rundown on who’s likely to be in the race, both internal and external. (Here’s a hint: It’s going to be an internal contender; Intel has never hired an outside CEO.)

“It is rapidly approaching high time for the company to provide color on a replacement,” Rasgon wrote. “While it appears they are actively vetting both internal and external candidates, we do not expect significant strategic changes regardless of the eventual choice as they have started the ball rolling on several initiatives that would be difficult to stop. … We would hope (but do not necessarily expect) that the company could provide additional information on the succession plan.”

In an open letter to the special committee of Dell’s board of directors overseeing the go-private process, Southeastern argued that the company failed to make an adequate case that shareholders should accept the $13.65-per-share offer made in February. The firm also said that the go-shop process managed by the committee resulted in what it calls “an inadequate outcome.”

It’s no surprise that Southeastern is arguing against the buyout proposal. It’s somewhere in the neighborhood of $800 million to $1 billion underwater on Dell shares, having made a long bet starting in 2005 at a time when the stock was trading mostly between $30 and $40 a share. It has no choice but to argue against a buyout that would force it to take a bath.

But, as the proxy statement released last month clearly shows, it was Southeastern that first lobbied Michael Dell to consider going private in the first place.

Southeastern makes one clear point: The buyout offer is taking advantage of a moment when Dell shares are trading at a pretty low point relative to its history, and the board had authorized share buybacks at an average of $15.25, much higher than the $13.65 buyout offer:

“The same Board that was confident with Dell buying its shares for $15.25 is now attempting to convince all shareholders that Dell’s business is in such dire straits that they should take $13.65 and exit their investments. We believe the Board’s sudden rush to sell is triggered by one thing: Mr. Dell’s desire to buy.”

Southeastern also appeared to throw its weight behind two competing proposals from the private equity firm Blackstone and the activist investor Carl Icahn.

It also questioned the wisdom of going private at all. “The proxy statement does not contain any sound reasoning for why, at this stage in the transformation, the company needs to be taken private,” the firm said.

Here’s the original letter:

MEMPHIS, Tenn., April 9, 2013 /PRNewswire via COMTEX/ — Southeastern Asset Management, Inc., the largest outside shareholder of Dell Inc. DELL +0.07% , today released an open letter to the Special Committee of the Dell Board of Directors and addressed Dell’s preliminary proxy statement.

The question now is whether Southeastern casts its lot with Blackstone, the private equity firm that has expressed an interest in offering $14.25 a share for at least part of the company, or Carl Icahn, the activist investor who wants to buy as much as 58 percent of it.

The full text of the letter is as follows:

April 9, 2013 Special Committee of the Board of Directors Dell Inc. One Dell Way Round Rock, TX 78682 Attention: Alexander Mandl

RE: Dell Inc. Proxy Statement

Dear Members of the Special Committee:

As the beneficial owner of 8.4% of Dell Inc.’s outstanding shares, we are writing today to express our views regarding the Company’s proxy statement. It is our position that the proxy statement fails to make a case for shareholders to accept the $13.65 per share Michael Dell / Silver Lake buyout offer. In addition, we believe that the Special Committee conducted a process that resulted in an inadequate outcome.

According to the proxy statement, Mr. Dell notified the Board of his intention to take the Company private in August 2012. The proxy statement clearly shows that, in their review, the Special Committee and Board of Directors reached conclusions that stand in stark contrast to views held by the Board prior to August 2012. While the Special Committee may have worked diligently and was assisted by credible and reliable professionals, even a good process — without the exercise of proper business judgment — can result in a bad transaction.

The Proxy Reveals a Robust Process Leading to an Inadequate Result

Over the last two years, under a Board authorized program, the Company has repurchased 224,000,000 shares for $3.4 billion at an average price of over $15.25 per share. The same Board that was confident with Dell buying its shares for $15.25 is now attempting to convince all shareholders that Dell’s business is in such dire straits that they should take $13.65 and exit their investments. We believe the Board’s sudden rush to sell is triggered by one thing: Mr. Dell’s desire to buy.

Furthermore, the proxy statement and the analysis performed by the Special Committee focus disproportionately on the End User Computing (EUC) business while giving little attention to the Enterprise Storage and Services (ESS) business. Southeastern’s in-depth analysis indicates that at the completion of the Company’s transformation to ESS, Dell’s future owners should realize valuation multiples significantly higher than those reflected in the current offer price.

It is not about the PC. It is not about the PC. It is not about the PC …

Management has repeatedly highlighted the ESS business on previous earnings calls and provided estimates that show that ESS will account for 35% of the Company’s fiscal 2014 estimated revenue and 58% of its fiscal 2014 estimated Non-GAAP operating income (OI). Because the 58% of Dell’s 2014 estimated Non-GAAP OI attributable to ESS is worth a much higher multiple than the 42% of Company profits tied to the EUC segment, the ESS business, Dell’s cash and Dell Financial Services (DFS) are worth far more than half of total corporate value (see Table 1).

Yet, in all the analytical work and the voluminous proxy statement, EUC and PC are referenced hundreds of times more frequently than ESS. This is a stark contrast to the Company’s prior emphasis on the emerging value of ESS. Given this change in public positioning, Dell’s shareholders should question why the Board is suddenly focused on EUC, and not on ESS — which was previously believed to be the future of the business.

In addition, the Board’s approach of initially limiting the potential acquirers to private equity firms that would allow Mr. Dell to have majority ownership of the Company and remain as CEO narrowed the potential bidders materially and contributed to the Board’s approval of a transaction at a price that undervalues the Company.

In fact, within the proxy statement, virtually every justification of the $13.65 per share price is based on a premium to market at the time of the analysis. Such an approach is misleading when it is based on a price at the low end of the trading range over the last 15 years. Instead, any valuation analyses should have compared the $13.65 offer price to the net asset value of the Company. Additionally, the valuation analysis should have focused on an appropriate multiple of the Company’s free cash flow per share, more than half of which is from the growing ESS business, plus the net cash on the balance sheet and the value of DFS.

The Special Committee Gave Limited Consideration to Shareholder Friendly Alternatives

In our February 8, 2013, letter to the Board, we stated that we would have been prepared to support a leveraged recapitalization and suggested it could have been done in the form of a $12 per share special dividend, a Dutch auction or another structure that would have allowed shareholders an opportunity to participate in Dell’s future. Despite the viability of such a transaction, the proxy statement shows that the Board and Special Committee spent little time researching a leveraged recapitalization. The lengthy proxy statement only discusses the “pros” and “cons” of a leveraged recapitalization on a handful of pages and in only a cursory manner. The proxy statement also does not provide any real analysis or give any attention to solutions that would have either allowed shareholders to receive a large special dividend or to remain shareholders of a company with a smaller share base. It appears that neither the Board nor the Special Committee aggressively pursued the leveraged recapitalization idea because senior management preferred a go-private transaction.

In addition, as widely reported, management spent over $13 billion on acquisitions of non-PC businesses which benefit from the very same cloud and mobility trends that are negatively impacting the PC business. Long-term owners such as Southeastern have supported Dell in its transformation into an enterprise solutions company, but are not being given the opportunity to participate in the return on that $13 billion investment.

On January 29, 2013, Southeastern sought a meeting with the Special Committee in response to market leaks regarding a reported go-private transaction. In that meeting, we asked the Special Committee why giving shareholders a choice, through some form of cash/stock election, would not be preferable, and in fact fairer, for those shareholders who want to participate in the Company’s upside. Dell’s proxy statement answers that question: quoting from page 38, “Mr. Dell and Silver Lake were not interested in pursuing a transaction such as the one proposed by Southeastern in which public stockholders would retain an interest in the Company.”

The Proxy Statement Contains No Justification to Take Dell Private

The proxy statement does not contain any sound reasoning for why, at this stage in the transformation, the Company needs to be taken private. In the entire proxy statement, we found only one page (page 82) devoted to Mr. Dell’s plans for the Company following the transaction. That single page is consistent with the Company’s prior public statements, and nothing about these plans requires that the Company be private.

In fact, in an interview with ZDNet two weeks ago, John Swainson, head of Dell’s software unit, essentially confirmed that it doesn’t matter whether Dell is public or private. He said, “the corporate structure of Dell doesn’t make a difference on how customers interact with our products or how we develop or sell them.” We note that many companies, including IBM, were able to successfully transform their businesses as public companies. In addition, BCG, an advisor to the Special Committee stated that “many of the ‘take-private’ value levers could (in principle) be applicable to [Dell] as a public company.”

The proxy statement reveals that the Board had become increasingly frustrated with management’s execution of the transition, and rather than try to solve the problem, it chose to give Mr. Dell the opportunity to purchase the Company from shareholders at an inadequate price. Mr. Dell would not be participating in the proposed go-private transaction if he did not believe in the Company’s future upside and his ability to execute the transformation of the business.

The Special Committee Has the Power to Act in the Best Interests of All Dell Shareholders

As we noted above, we believe the proxy statement fails to make a case for shareholders to accept the $13.65 per share Michael Dell / Silver Lake buyout. For shareholders trying to decide whether to support the transaction, the Company’s suspension of earnings guidance and extremely limited discussion of the Company’s future plans will make it difficult to make an informed choice. In the next draft of the proxy, the Special Committee should provide sufficient detail about Mr. Dell’s future plans so that public shareholders can properly evaluate their options.

The Special Committee has obtained two preliminary alternative proposals, both of which we view as superior to the Michael Dell / Silver Lake buyout. We view these proposals as superior primarily because each offers shareholders the opportunity to remain owners of Dell while also offering a higher cash price to owners who choose to exit their investment.

Southeastern urges the Special Committee to negotiate and evaluate these alternatives in good faith, and to recognize that offering shareholders a choice is a win / win outcome for all parties. We call upon the Special Committee to work hard to make this possibility a reality.

Sincerely,

O. Mason Hawkins G. Staley CatesChairman & CEO President & CIO

ABOUT SOUTHEASTERN ASSET MANAGEMENT

Southeastern Asset Management, Inc., headquartered in Memphis, Tenn., is an investment management firm with $34 billion in assets under management acting as investment advisor to institutional investors and the four Longleaf Partners Funds: Longleaf Partners Fund, Longleaf Partners Small-Cap Fund, Longleaf Partners Global Fund and Longleaf Partners International Fund, as well as two Irish domiciled UCITS Funds: Longleaf Partners Global UCITS Fund and Longleaf Partners US UCITS Fund. Southeastern was established in 1975, and the first of the Longleaf Partners Funds was launched in 1987.

Whitworth, the head of Relational Investors LLC, has more skin in the game from a financial perspective than any other HP director. He owns about 17 million HP shares, worth about $800 million.

Whitworth says the company’s board will be recruiting a new chairman and at least two other directors to replace G. Kennedy Thompson and John Hammergren, both of whom resigned today. Ray Lane relinquished HP’s chairmanship, but will remain on the board.

The shake-up follows a closely watched proxy vote last month in which Lane, Hammergren and Thompson were targeted by unhappy shareholders. All three received only a thin majority of votes in favor of their retaining their seats.

Here’s Whitworth’s memo:

Why I Believe in HP’s Turnaround

HP today announced important changes to its board of directors. Ray Lane has decided to step down as chairman, and he will continue to serve as a director. John Hammergren and Ken Thompson have decided to leave the board, and both directors will continue to serve until the May board meeting. Lastly, I will be serving as chairman of the board, on an interim basis, while a search is conducted for a new chairman.

Each one of our directors considered the results of our recent shareholder meeting and made the personal decision to do what they felt was best for HP. As I have said many times, this board is among the best with which I’ve worked. Today’s announcement is a testament to our chairman’s and departing board members’ statesmanship and sterling professional standards. They, like all of us, are passionate about moving beyond the challenges of the past few years so we can focus solely on supporting the HP team as Meg leads us through this Herculean turnaround.

In the coming months you will see further evolution of our board of directors. We will recruit a world-class chairman to take my place as soon a possible, and we also hope to recruit at least two other outstanding directors before the end of this year. While sooner is better, rest assured we will not allow the rush of time to compromise our focus on recruiting the best of the best.

The firm that I represent, Relational Investors, owns roughly $800 million worth of HP’s stock. So, I can assure you that my interests are completely aligned with those of our shareholders. Besides its enviable industry position and unbelievable products and product pipeline, let me tell you why I believe in this company. It comes down to two things—people and leadership.

I have had an opportunity to spend a fair amount of time with people across HP, including speaking with the top 1,100 leaders at their recent leadership meeting. I walk away from every interaction more confident about this company’s future. There is a palpable energy and excitement at every level of the company to get our business turned around. I’ve worked on many, and led a few, similar efforts in my 28-year career, and I can tell you this: one does not find the telltale “green shoots” in financial metrics, graphs and charts, but rather in the eyes, faces, words and actions of people. All turnarounds start and end with people, and I see green shoots every where I turn at HP—it is happening as we speak, and I guarantee you it will be the most satisfying thing in each of our careers to be here, deeply involved, as it unfolds.

Leadership is what turns a group of great people with great energy and ideas into a team. Some say it’s a gift, and some say it’s a skill, but I think it’s both, and hands down Meg Whitman is among the most gifted and skilled business leaders in the world today. Her enthusiasm and energy is contagious and she has brought us all together as a team to tackle one of the greatest business challenges in the history of industry. I have dealt with a lot of CEOs in my career. That’s what I do in my “day job,” but I can say I have not had the opportunity or privilege to work with one as gifted and skilled as Meg Whitman. Her track record is the proof, and she is building on it here at HP, where working out of her cubical in Palo Alto she has assembled a world-class leadership team. It’s clear to me that they are committed to hard work, unyielding business ethics, knowing the details and shaping the strategy. That said, their ability to inspire the HP team to rally behind a shared vision has, more than anything else, made me a believer.

So, on behalf of the board, let me thank our team members for all of their work to date and say that we are 100 percent committed to supporting Meg and their efforts to turn around HP and restore it to its rightful place at the pinnacle of global business.

Two other HP directors, John Hammergren and G. Kennedy Thompson, will resign.

Lane is a former president of Oracle and is still a managing partner at the legendary venture capital firm Kleiner Perkins Caufield & Byers. He joined HP’s board in late 2010 not long after Léo Apotheker became CEO, first as non-executive chairman. He then became executive chairman after the Sept. 2011 shakeup in which Apotheker was fired and then-director Meg Whitman was named CEO.

Whitworth is the activist investor who took a board seat in November of 2011 after buying up more than 17 million HP shares. Whitworth will become chairman of the Finance and Investment Committee, replacing Hammergren.

The story was first reported by The Wall Street Journal. HP spokesman Michael Thacker confirmed the report to AllThingsD via email.

Lane, Hammergren and Thompson had all been targeted by unhappy shareholders seeking to unseat them in a proxy vote at HP’s shareholder meeting in San Jose, Calif., last month because of Lane’s involvement with HP’s $11 billion acquisition of the British software firm Autonomy. Lane survived the vote — nearly 59 percent of shareholders voted in favor of his retaining a board seat — but according to The Journal he was uneasy with the margin and chose to leave the chairmanship.

At the shareholder meeting, Hammergren received less than 54 percent of yes votes. Thompson received about 55 percent.

Thompson had been chairman of the board’s audit committee. Director Rajiv Gupta was named its new head. Director Gary M. Reiner will replace Gupta as chairman of the Nominating and Governance Committee.

A source familiar with the company’s plans says the process of recruiting three or four new directors, including an outside, non-executive chairman, is just getting underway and will likely take a few months.

HP just sent a press release on all this:

HP Announces Changes to Board of Directors

Raymond J. Lane steps down as chairman, remains a director Ralph V. Whitworth becomes interim chairman G. Kennedy Thompson and John H. Hammergren to leave board

PALO ALTO, Calif., April 4, 2013 — HP today announced changes to its board of directors. Raymond J. Lane has decided to step down as chairman of the board, to be replaced on an interim basis by Ralph V. Whitworth. The board is commencing a search for a permanent nonexecutive board chairman.

In addition, John H. Hammergren and G. Kennedy Thompson, after eight and seven years of service to HP stockholders, respectively, have decided to leave the board. Both directors will continue to serve until the May board meeting. The board is commencing a search for two or more new independent directors.

“After reflecting on the stockholder vote last month, I’ve decided to step down as executive chairman to reduce any distraction from HP’s ongoing turnaround,” said Lane. “Since I joined HP’s board a little over two years ago, I’ve been committed to board evolution to ensure our turnaround and future success. I’m proud of the board we’ve built and the progress we’ve made to date in restoring the company. I will continue to serve HP as a director and help finish the job.”

“Ray, John and Ken are terrific leaders, and they’re passionate about doing the right thing for HP,” said Whitworth. “From here we will continue to recruit outstanding directors, strengthen our governance and do the best we can—the best we know how—for stockholders. Meg is leading a Herculean turnaround, so most of all, we must build and maintain the best possible leadership structure for Meg and HP’s entire team to succeed.”

“Ray, John and Ken have invested a part of themselves in HP,” said Meg Whitman, HP president and chief executive officer. “Their leadership is reflected in the early success we’ve had turning the company around. I’m grateful that Ray will continue to serve, and I wish John and Ken the very best. I also appreciate Ralph’s willingness to increase his responsibilities during this transition.”

With Lane stepping down as executive chairman, the role of lead independent director, currently held by Rajiv L. Gupta, is no longer necessary and will be eliminated. Gupta will remain on the board and will replace Thompson as chairman of the Audit Committee.

Dell and his partner in the deal, the private equity firm Silver Lake Partners, first offered $11.22 a share for the company, and during the course of a lengthy negotiation process that included 25 separate meetings, raised its offer price six times, adding $4 billion to to the pot. The parties finally settled on $13.65 in an offer announced last month.

The filing also shows that CEO Michael Dell met with representatives of private equity firms Blackstone Group and Francisco Partners, which have teamed up to make a competing offer for the company. The meetings occurred on March 7 and 8, during a 45-day go-shop period, when a special committee of Dell’s board overseeing the process sought superior offers.

Blackstone, as well as the activist investor Carl Icahn, last week uncorked offers they argue are better than than the Dell-Silver Lake bid.

The new disclosures are contained in a massive 274-page proxy filing with the U.S. Securities and Exchange Commission that was made public only minutes ago.

Among the other new disclosures made in the filing, which you can read below:

• The process of going private began in earnest on June 15, 2012, when Dell’s largest shareholder, Southeastern Asset Management, which owns about 7 percent of Dell’s shares, contacted Michael Dell about the possibility. Dell said he’d think about the idea.
• The special committee was motivated to embrace the go-private option in part by the rapid slowdown in Dell’s various lines of business; they were not satisfied that the turnaround plan put in place by CEO Michael Dell to push the company away from personal computers and toward enterprise hardware and services was having the desired effect.
• As of the end of Dell’s third fiscal quarter in 2013, its revenue for each of its prior seven quarters had fallen below internal forecasts. Dell had missed numerous quarters and, except in one case, the expectations of analysts. The company brought in BCG to revise those forecasts. BCG’s forecasts showed Dell’s revenue declining from $62 billion in the fiscal year ended January 2012 to $54.3 billion through the fiscal year ended February 2017.
• Michael Dell held his first conversations with Silver Lake on July 17, 2012, the same day he participated in this interview with AllThingsD. They agreed to meet more formally the following month. He also approached another private equity firm named only as “Sponsor A” which is said by people familiar with the matter to be KKR, in meetings held on Aug. 11 and 13.
• Another key date was Dec. 6. On that day, during a meeting of Dell’s board, Michael Dell made the case that the only way out of the company’s weakening state was to carry out a dramatic remaking. The strategy he would carry out would require significant investments in research and development and acquisitions, hiring a large number of sales people, expanding business in emerging markets and investing in the development of new products. All of those, carried out at once, would be expensive undertakings that would hurt the company’s share price. “Mr. Dell stated his belief that such initiatives, if undertaken as a public company, would be poorly received by the stock market because they would reduce near-term profitability, raise operating expenses and capital expenditures, and involve significant risk,” the filing reads.
• Dell argued in this presentation that going private is the best option for shareholders because they’d receive some compensation in the form of a premium for their shares without having to bear any of the risk should the strategy not work out.
• At least one other private equity firm was approached about partnering with Dell on a buyout. A company described in the filing only as “Sponsor B” is thought by sources close to the process to be TPG. The identity of another company mentioned in the filling, described only as “Sponsor C,” is not yet clear.

Here’s the filing. I’ll have more as I go through it.

Dell Inc LBO Proxy filing. March 29. 2013

Director Marc Andreessen got a 69.77 percent yes vote. John Hammergren had the smallest margin, receiving a vote of 53.91 percent in favor of his remaining on the board. Chairman Ray Lane got 58.88 percent of yes votes. G. Kennedy Thompson received a 55.15 percent vote in favor of his remaining on the board.

As proxy votes go this is about as close as you can come without actually removing a director. If nothing else, it’s hard for HP’s board not to have received the message loud and clear that shareholders were sending about the Autonomy deal and other difficulties the company has faced.

Here are some highlights from the day’s events.

1:59 pm: So it’s nearly 2 pm here in Mountain View, Calif., and we’re waiting for HP’s shareholder meeting to get under way.

Still waiting. The light FM jazz just stopped playing and now the audience is quiet. Aaaand just like that, onstage there’s Meg Whitman, Ray Lane, CFO Cathie Lesjak, chief legal counsel John Schultz and I think Rajiv Gupta from the board of directors.

Actually it’s not Rajiv Gupta, but a deputy general counsel whose name I don’t know.

John Schultz is speaking and is asking shareholders to observe meeting rules. He’s talking about the three shareholder proposals. Those who wish to speak in support or against the proposals can do so for only about five minutes.

More formalities to get the meeting going. A quorum is declared present. And the meeting can officially get started.

Now the slate of directors is up. All 11 directors are up for reelection to the board.

The second order of business is to re-appoint Ernst and Young as HP’s auditor. There are some proxy firms and other shareholder groups that are advising against that, in part because they blame Ernst and Young for failing to foresee some of the mess that was the Autonomy acquisition.

Other items of business is the say on pay proposal, a stock compensation plan and the formation of a human rights committee.

A shareholder is now speaking in favor of the human rights proposal. It deals with how HP does business in China and other countries with oppressive political regimes.

Schultz is speaking, and says that the creation of another committee to oversee human rights issues isn’t in the business of shareholders.

Another human rights proposal is up, submitted by a set of religious groups. A reverence whose name I didn’t quite catch is now speaking about it. “We have noted HP’s policies to human rights and related to supply chain and equal opportunity.”

2:20 pm: I’m paraphrasing what he says: He’s speaking on behalf of a proposal that would require HP to report in more detail on supply chain issues, making sure that workers employed by suppliers are protected. HP reports on a lot of this stuff already, but he’s pushing for a lot more detail.

Often, he says, confidentiality rules prevent HP from disclosing exactly how it evaluates its human rights policies with suppliers.

Schultz is speaking again and says the company opposes the proposal.

Now another shareholder proposal, this one about retirement plans.

Schultz is speaking again, opposing the latest proposal. And getting the voting under way.

2:32 pm: Okay, CEO Meg Whitman is speaking. Her remarks are starting with a video.

Meg again: “Most of you know that I’ve been CEO for 18 months. I’ve come to love this company.”

“I’ve now met with 300 or 400 customers around the globe, and they tell me they want HP to win.”

“Some of our customers have operations in 150 or 160 countries, and they want a partner that can match them every step of the way.”

Now on to innovation. “Did you know that HP was the top of the list for patents obtained in 2012 in Silicon Valley, and No. 50 worldwide.”

“But we have to do more, better, faster.”

“Third, I’ve found that HP has tremendous foundational assets, and talented and committed employees. And lastly despite what you may have read, we’re on a solid financial footing.”

“The biggest thing I’ve learned in the last year, is that together we truly make it matter.”

“There is still room for improvement. Fiscal 2012 results were not where they needed to be.”

Whitman: Partners are crucial to our future and we need to embrace them like never before.

Whitman is now revisiting the plan she laid out at the analysts meeting last year.

Whitman: The good news is, we said what we said we would do in 2012. We took action, and took our medicine, and met our guidance.

2:40 pm: Whitman: We expect 2014 will be characterized by recovery and expansion.

2:41 pm: In 2015 we expect you’ll see a rapid acceleration of growth and innovation.

Whitman is now reiterating the financial results.

Whitman: Net debt position has improved to $4.7 billion. But we’re not done. We have a long way to go.

First is creating solid product roadmaps that change how IT is designed and built.

We are reigniting the powerhouse of HP, which is the channel.

Whitman: Why I’m so confident about our strategy: We are living in a period of enormous change. Big shifts in how technology is consumed, used and paid for.

Whitman: It feels like a bigger change than what I saw at eBay.

Whitman: We will succeed because only HP can provide the solutions for the new style of IT. We are the only company that can bring our customers devices, services, software all at once.

2:48 pm: Whitman is closing her remarks.

It has essentially been a repeat of the same speech she’s been giving since HP reported its most recent quarter.

Whitman is closing with some nice praise of HP employees, who “continue to innovate through thick and thin.” She’s now wrapped up.

Time for a Q and A with the shareholders. I see about seven people queuing up to the mics from where I’m sitting.

A question about the data center business. Now about 15 people lining up for questions.

The questioner opines: Over the last two or three years I’ve lost lost half the value of my HP shares.

Whitman: One of the question you’re asking is if you’re better off with a vertical stack versus a commitment to open standards. One of the strengths of this company is the hardware business and the commitment to open standards and open architecture.

Whitman: Now she’s talking about Moonshot, the tiny servers using Atom or ARM chips and which use less power, and take up a lot less space. It’s disruptive innovation, she says.

Whitman is now talking about the 3Par storage business, which tends to simplify enterprise storage.

Whitman: We are actually sold out of our mid-tier storage product. We haven’t been sold out of a product in quite a long time.

Whitman: We are also the leader in software defined networking.

Question: What is the board’s thinking with regard to nominating an independent chairman?

Whitman: I came to HP at a difficult time. My view about the board is that they are helping to turn HP around.

Whitman: This group is helping me lead the transition. Once you decide how you’re going to run your company, you have to get everyone marching in the same direction.

Another question: Change to Win is up. Bill Patterson is speaking. “A strong opposition vote will be delivered to several directors who were involved in overseeing the Autonomy acquisition. In the event that some directors don’t receive a majority vote, the board should comment on that and what it intends to do going forward.”

3:02 pm: Patterson is still speaking. These shareholder rights are of limited value that the company can demonstrate that it has active independent directors. Will the board comment in the event of a strong opposition vote?

Meg just called on director Ralph Whitworth, the activist investor, who owns a lot of shares. He says that he bought the shares and approached the company. He offered himself as a director and Meg and Chairman Ray Lane were up for it. “You can expect some evolution of the board in the coming weeks or months.”

3:06 pm: Whitworth: I hope you will respect the results today and work with us to make this company stronger and more valuable.

More questions. SEIU union trust, a pension fund. Can you confirm that Whitworth has been appointed to a special committee to investigate the Autonomy acquisition. There’s a concern that directors who were involved with that deal not be on that committee.

John Schultz confirms a special committee has been formed. Whitworth, Gary Reiner and G. Kennedy Thompson are on it.

Schultz: The independence of this committee is passed on by a court of law. We believe the committee has the right scope of charter, and the members are the right ones in place consistent with the law.

The questioner is expressing “grave concern” that Thompson should not be on the committee.

A former HP employee, one who dates back to what he calls “the good old days,” would like HP to celebrate its 75 anniversary. Lots of applause.

Whitman: We have an employee committee on that.

Another question. Seven more people in the line. Latest questioner asking about human rights, surveillance in less developed countries. “Never ever admit that David Packard is most admired for cutting 10 percent off expenses, and cutting his own compensation.”

The questioner is suggesting the elimination of health insurance brokers somewhere in the employee benefit process.

Now 10 more people waiting in line to ask questions.

The “question” is more or less turning into a political diatribe about health care policy. Whitman is cutting her off and asking her to get to the point.

3:15 pm: She’s basically trying to get Whitman to support a single payer health insurance scheme.

Another question from a Presbyterian Minister. Something about never voting against the State of Israel. However, he says, HP is selling its products in a way that support the “occupation” of Palestine. He’s asking for transparency, which he says is lacking in the Proxy statement on how products are being used.

Whitman is pointing out an HP exec who is responsible for responses to questions like this, to address his concerns.

Another question from a shareholder and retiree. “My portfolio has taken a dramatic fall. Regardless of this, I marked a ballot to support everything the board recommends.” He’d now like to read something published in 1976.

He’s asking Whitman to stand up for the old HP Way. “It turns out its really hard to kill founder DNA. … We are at our core an engineering company.”

Question from a representative for the AFL-CIO fund. Can you address how the board expects the biggest vote against an S&P auditor in a long time? It’s a question about the proposal to dump Ernst and Young as an auditor.

Whitman: When we do an outside enterprise deal, we have to have someone certify the financials. To have someone other than our auditor do it, it’s not a good use of your money. It would be duplicative to have someone else do it.

Question: What other boards does Whitman serve on? How do you justify the time spent on other boards.

Whitman: After I lost the governor’s race [in California] I was asked to go on a lot of boards and I did. I have been reducing my committments to other boards. She used to be on the board of ZipCar and is now off that as the company has been sold. The remaining corporate board I sit on is Proctor and Gamble and that is good for HP. It’s good to see another big company struggling.

The same questioner is a fan of his HP 20S calculator. “It’s an example of the HP Way. I’d like to see that return.”

Whitman: I came to set this company up for the next 75 years. This company is an icon of American business. We are important around the globe.

One last question and then it’s time to announce the results of the vote.

Last question is from a guy who lived across the street from David Packard. Apparently,he’d like to sell a company to HP. Whitman is laughing.

Whitman is referring him to CFO Cathie Lesjak.

Proxy vote time.

This is the moment of truth. A few stragglers are still voting.

3:29 pm: Polls are closed.

Chairman Ray Lane is announcing the results based on the preliminary tally. Directors first. All have received at least 50 percent. All 11 directors have survived.

3:31 pm: And Ernst and Young has been renominated as HP’s auditor.

The directors and Ernst and Young were the two big items. We don’t yet know what the percentages were on the various directors who had been targeted by ISS, Glass Lewis, Calpers and others.

What’s left is the proposals on human rights committees. Less than 4 percent voted in favor.

It’s pretty much going as the company recommended. Patterson from Change to Win is asking for the percentages on the director votes.

Lane is declaring the business of the meeting concluded. That ends the meeting.

And we’re done!

CEO Meg Whitman will make a presentation, essentially reiterating her plan to rebuild and repair HP’s foundations in 2013, and to nudge it back over the line to revenue and profit growth in 2014 and beyond. Analysts have generally turned cautiously optimistic toward HP, especially since its last quarterly earnings report.

Numerous shareholders are seeking to rattle both HP management and its board of directors by opposing the reelection of as many as five of those directors. One powerful proxy advisory firm, Institutional Shareholder Services, is urging shareholders to vote against Chairman Ray Lane and directors John Hammergren and G. Kennedy Thompson. Another proxy firm, Glass Lewis, is opposing four directors, including Hammergren and Thompson, as well as Marc Andreessen and Rajiv Gupta.

Calpers, the powerful California pension fund, has vowed to vote against all five: Lane, Andreessen, Hammergren, Thompson and Gupta, and will also vote against ratifying Ernst & Young as HP’s auditor.

The most likely outcome is that the directors under fire will survive the proxy vote, though of the five directors catching the most heat, Hammergren and Thompson are generally seen as the most vulnerable.

Of course, the day of HP’s shareholder meeting wouldn’t be complete without some fireworks from Mike Lynch, the former CEO of Autonomy, the British software company for which HP paid $11 billion in 2011, only to write its value down about half a year later.

In an open letter to HP shareholders, Lynch reiterated complaints, and asked some interesting questions about HP’s accusations that he and his lieutenants essentially inflated Autonomy’s value before HP acquired it. The text is below:

Open letter from Mike Lynch to the shareholders of Hewlett-Packard

20 March 2013

Today HP will hold its annual shareholder meeting. This meeting provides a moment of accountability for HP’s Board of Directors to all its stakeholders, and is an appropriate time for the Board to address material questions.

A significant issue for HP’s stakeholders is the allegations HP has made against the former management team of Autonomy in relation to the acquisition of that company, and the related impairment charge of $8.8 billion taken against shareholder funds. As a member of the former management team of Autonomy I have a shared interest with the shareholders of HP (of which I am not one) in getting to the bottom of those allegations, understanding exactly what happened within HP related to this situation and resolving it as soon as possible.

We therefore put forward some questions that we believe HP’s Board of Directors needs to answer at the shareholder meeting:

1. Can the Board provide details and evidence of the allegations it has made against the former management team of Autonomy to shareholders and to the people it has accused, so that everyone can understand the allegations that are being made and how it relates to the decisions and statements the Board has made? Can the Board confirm when it first became aware of these specific allegations? Will the Board provide the report from PwC on which its allegations are based to the former Autonomy management team so that this issue can move toward resolution? Will the Board also make available the conclusions of the findings of the recently appointed committee investigating the circumstances of the acquisition?

2. How did HP calculate the impairment charge it has taken against Autonomy? Several qualified commentators, including a former Chief Accountant of the SEC, have questioned how the alleged irregularities in Autonomy’s accounting could generate such a large write-down. How much of the impairment charge was related to the operating performance of Autonomy post-acquisition?

3. Did HP approach the UK Takeover Panel at any stage in an attempt to rescind its offer to buy Autonomy before completion? If so what was the reason it gave and why was this material change of view not communicated to shareholders?

4. The former management of Autonomy began alerting Ms Whitman as early as December 2011 to significant problems with the integration of Autonomy into HP that were negatively impacting its performance. When did Ms Whitman acknowledge that Autonomy was not performing against expectations? Why was this not communicated to shareholders at that time?

5. Will HP commit to behaving in a transparent manner in providing information about these allegations and the legal processes that have been set in motion? This includes not pre-empting announcements by regulatory authorities and not waiting long periods to disclose information.

We continue to reject the allegations made against us by HP and believe it is in the interests of all parties that these questions be addressed directly by the Board so this issue can be resolved as swiftly as possible. HP has acted in an aggressive and unusual manner throughout this episode, making highly damaging public accusations without providing any supporting evidence, either to the public or to the people they have accused.

As we have said before, we believe the problem with the Autonomy acquisition by HP lies in the mismanagement of that business by HP under its ownership, making it impossible for Autonomy to deliver on HP’s expectations. Autonomy’s accounts were fully audited by Deloitte throughout the period in question and Deloitte has confirmed that it conducted its audit work in full compliance with regulation and professional standards. We refuse to be a scapegoat for HP’s own failings.

Dr Mike Lynch

Dell’s board of directors confirmed what CNBC first reported yesterday in a filing with the U.S. Securities and Exchange Commission that contains the letter that Icahn sent, and which you can read below.

In the letter, Icahn argues that the proposal to buy shareholders out at a price of $13.65 a share “substantially undervalues” the company. Instead, Icahn proposes that in the event that the proxy vote to go private fails — and there’s a good chance that it will — the company would pay shareholders a special dividend of $9 a share, to be financed by a combination of existing cash on hand, receivables and debt.

If the board refuses the proposal, Icahn intends to fight: Submit a new slate of directors who would be committed to implementing the special dividend. Icahn would then provide as much as $5.25 billion in bridge loans, should they be needed.

Icahn also threatens “years of litigation” in the event the go-private deal does go through.

In response, the special committee of Dell’s board handling the go-private business said in the filing that it is running a “go-shop” process to seek out third parties who might make a better offer. Yesterday, Bloomberg News reported that Hewlett-Packard, Lenovo and private equity fund Blackstone are using that go-shop process to kick Dell’s tires and get a look at Dell’s books, but that an alternative bid is unlikely from them.

Here’s what Dell’s special committee had to say about Icahn’s approach:

“The Special Committee is currently conducting a robust ‘go-shop’ process to determine if there are third parties interested in proposing alternative transactions that could be superior for Dell’s public shareholders to the going-private transaction — and we welcome Carl Icahn and all other interested parties to participate in that process. Evercore Partners, an independent financial advisor to the Special Committee, is actively soliciting third parties to determine their potential interest and is incentivized to find a superior proposal if one exists.

The process will run through March 22, 2013, after which negotiations will continue if a potentially superior proposal emerges. Our goal is to secure the best result for Dell’s public shareholders — whether that is the announced transaction or an alternative.”

And here’s Icahn’s letter:

Icahn Enterprises L.P.
March 5, 2013
Board of Directors
Dell Inc.
One Dell Way
Round Rock, Texas 78682

Attn.: Laurence P. Tu
Senior Vice President, General Counsel and Secretary
Re: Agreement and Plan of Merger, dated as of February 5, 2013
(the “Going Private Transaction”).

Dear Board Members:

We are substantial holders of Dell Inc. shares. Having reviewed the Going Private Transaction, we believe that it is not in the best interests of Dell shareholders and substantially undervalues the company.

Rather than engage in the Going Private Transaction, we propose that Dell announce that in the event that the Going Private Transaction is voted down by shareholders, Dell will immediately declare and pay a special dividend of $9 per share comprised of proceeds from the following sources: (1) $4.26 per share, or $7.4 Billion, from available cash as proposed in the Going Private Transaction, (2) $1.73 per share, or $3 Billion, from factoring existing commercial and consumer receivables as proposed in the Going Private Transaction, and (3) $4.26, or $5.25 Billion in new debt.

We believe that such a transaction is superior to the Going Private Transaction because we value the proforma “stub” at $13.81 per share using a discounted cash flow valuation methodology based on a consensus of analyst forecasts. The “stub” value of $13.81 combined with our proposed $9.00 special dividend gives Dell shareholders a total value of $22.81 per share, representing a 67% premium to the $13.65 per share price proposed in the Going Private Transaction. We have spent a great deal of time and effort in determining the $22.81 per share value and would be pleased to meet with you to share our analysis and to understand why you disagree, if you do.

We hope that this Board will agree to adopt our proposal by publicly announcing that the Board is committed to implement our proposal if the Going Private Transaction is voted down by Dell shareholders. This would avoid a proxy fight.

However, if this Board will not promise to implement our proposal in the event that the Dell shareholders vote down the Going Private Transaction, then we request that the Board announce that it will combine the vote on the Going Private Transaction with an annual meeting to elect a new board of directors. We then intend to run a slate of directors that, if elected, will implement our proposal for a leveraged recapitalization and $9 per share dividend at Dell, as set forth above. In that way shareholders will have a real choice between the Going Private Transaction and our proposal. To assure shareholders of the availability of sufficient funds for the prompt payment of the dividend, if our slate of directors is elected, Icahn Enterprises would provide a $2 billion bridge loan and I would personally provide a $3.25 billion bridge loan to Dell, each on commercially reasonable terms, if that bridge financing is necessary.

Like the “go shop” period provided in the Going Private Transaction, your fiduciary duties as directors require you to call the annual meeting as contemplated above in order to provide shareholders with a true alternative to the Going Private Transaction. As you know, last year’s annual meeting was held on July 13, 2012 (and indeed for the past 20 years Dell’s annual meetings have been held in this time frame) and so it would be appropriate to hold the 2013 annual meeting together with the meeting for the Going Private Transaction, which you have disclosed will be held in June or early July.

If you fail to agree promptly to combine the vote on the Going Private Transaction with the vote on the annual meeting, we anticipate years of litigation will follow challenging the transaction and the actions of those directors that participated in it. The Going Private Transaction is a related party transaction with the largest shareholder of the company and advantaging existing management as well, and as such it will be subject to intense judicial review and potential challenges by shareholders and strike suitors. But you have the opportunity to avoid this situation by following the fair and reasonable path set forth in this letter.

Our proposal provides Dell shareholders with substantial cash of $9 per share and the ability to continue as owners of Dell, a stock that we expect to be worth approximately $13.81 per share following the dividend. We believe, as apparently does Michael Dell and his partner Silver Lake, that the future of Dell is bright. We see no reason that the future value of Dell should not accrue to ALL the existing Dell shareholders — not just Michael Dell.

As mentioned in today’s phone call, we look forward to hearing from you tomorrow to discuss this matter without the need for us to bring this to the public arena.

Very truly yours,
Icahn Enterprises L.P.
By: Carl C. Icahn
Chairman of the Board

Dell rose nearly 2 percent after CNBC reported Icahn’s move, though it hasn’t been completely confirmed since Icahn hasn’t filed a 13D with the U.S. Securities and Exchange Commission confirming. CNBC cited “trading sources” who were confident about it, however. Investor sentiment appeared to waver a bit in choppy after-hours trading.

Assuming Icahn’s position is confirmed, the fight against Dell’s go-private plan suddenly gets a lot more interesting. Icahn is said to want a “leveraged recapitalization” of the company instead of the buyout at the proposed price of $13.65 a share. He’s also interested in a special dividend amounting to $9 a share.

Earlier today, Dell’s board of directors defended their actions against criticism from shareholders. Some, like Southeastern Asset Management, have argued that the buyout price is too low, and should be closer to $24 a share.

And if that weren’t enough, Bloomberg News is now reporting that Hewlett-Packard and Lenovo have been drawn into discussions with Dell’s board as part of the “go-shop” process during which Dell’s board is supposed to be seeking superior bids.

Yet in the second paragraph, Bloomberg’s chatty banker sources drain all the importance out of the story. The only reason HP and Lenovo are kicking the tires is to see Dell’s books, “so it’s unlikely an alternative bid will emerge.”

At the point where I wrapped up part one of our conversation from late last year, Levine had been talking about opportunities he saw around data storage in the enterprise. As he sees it, another big space ripe for disruption — and thus investment — is in security. That’s where the conversation picks up below:

AllThingsD: So Andreessen Horowitz has done a bunch of security deals. What kinds of opportunities are you seeing there?

Levine: Data security. Okta puts active directory out in the cloud. All SAAS apps, everything goes out there. That’s access control, which very much is security. Security is also being exacerbated by the number of mobile devices in an environment. If you have BYO devices and you’re using someone else’s SAAS, as a CIO you don’t own either piece of that. So an interesting security problem to solve is how you make corporate data usable in that scenario.

Is anyone coming close?

Sure. There’s one company in our portfolio. Silver Tail (now part of EMC) does behavioral prevention. It can look at the behavior of an endpoint and determine if it’s a human being. If you can detect patterns of illicit behavior, you can shut them down before they do any damage. So that’s interesting. Bromium, which just announced, which builds impenetrable walls around processes that live on mobile devices. The premise of Bromium is that you no longer have to do virus scanning. It assumes that viruses are coming into a system anyway, and they’re going to come by way of something like a browser, and affect a running process. But if that process is wrapped by an impenetrable wrapper, it can’t get onto the system. To kill that virus, all you do is shut down that process. So that’s an interesting investment we’ve made.

How do you go about finding the companies that you invest in?

We are not thematic investors, first of all. And I love that. To me, if you’re a thematic investor you end up being the 40th one to pick a company in a given stack, because you have to be in on a certain kind of company. We really do see nearly 100 percent of all the deals that are occuring at any given point of time. We evaluate every single company on its merits. As soon as we say we need to be in on something like, say, database technology, then all of a sudden I have made a preordained and preconceived decision that this is important. I don’t want to have a bias coming into things, that I throw out something that’s actually interesting, or include something that may be way overinvested. We look at each company as a fresh canvas, but we will look at companies that have great technical co-founders who believe that they are going to go dominate a given market segment. It may not be obvious at all. Most obvious things are obvious to many people. It’s a matter of finding the non-obvious things. There are a lot of things we see, and there are a lot of areas where we haven’t invested.

Is that how do you explain GitHub? That was a huge deal, and no one really understood it at first.

I wasn’t really looking to invest in a collaborative source code control system. Before last year, I didn’t even know it existed, and didn’t internalize the value of what they do. After we met them and realized the power of what they do, and have done, and the potential future for that company, we invested. It’s interesting when you don’t have biases and just let everyone come in and pitch, knowing you really can see things in the eyes of the entreprenuer, which I believe is really critical. As soon as I have opinions, I start to shape the company in my mind’s eye, and that’s really backward, because as a board member you want them forming the vision and to help along the way.

I’m hearing deal flow has been really high. Is that likely to continue for awhile?

It’s good that we’re seeing tons of stuff, and there’s a tremendous amount of innovation occuring. It used to be there was a lot of consumer stuff going on, and maybe only a few things happening in the enterprise. Now the enterprise deal flow is much higher than consumer. But I’ll tell you, it’s so cool to see all that. And we’ll pass on most things. But it’s cool being here, at this firm, but also at this time. The last time there was really a lot of flourishing innovation around the enterprise was in the mid-1990s.

Will you be doing many more deals in 2013?

I’m sure we will. We have a lot of seed investments right now. It’s a lot like dating before you get married, so I’m a big believer right now in what we have going on with our seed portfolio. They’ve come up for A rounds, and we have the opportunity to really work with the company. But I like seeds, because you get to watch a company and watch the execution and the dynamics of the team. One recent deal we did was Convergent-IO, which was a seed that turned into an A round.

What do you like and dislike in a team?

We’re very much pro-technical co-founder or founder. I would say that that is like a fundamental criteria. It is easier to coach a technical co-founder on how to run a business than it is to coach a professional manager on the DNA of what the vision of the company is. We look for someone who has a burning passion to go take on the world. We want entrepreneurs that want to go for the long ball. They want to run the company for the long term, and they want it to be a standalone enterprise, as opposed to building something to get acquired. We also like to make sure the entrepreneur understands how they’re going to use the money they’re raising. We like for them to have an appreciation of the clear understanding of how to get from point A to B.

The move, which hasn’t previously been reported, came even though a month earlier Apple’s board had urged shareholders to oppose a very similar corporate-governance measure proposed by a shareholder.

Read the rest of this post on the original site »

And if you haven’t here’s a rundown: A collection of pension funds led by the investment arm of the labor federation Change to Win — a.k.a. CtW — has decided to start a push to eject three HP directors who are standing for reelection at a meeting next month. The three in the CtW’s sights are Chairman Ray Lane (pictured), John Hammergren and G. Kennedy Thompson.

CtW owns about 7.8 million shares, which amounts to less than one half of 1 percent of HP shares outstanding, so the chances of the group succeeding are pretty small. But the larger group behind the effort is said to own about 135 million shares, or nearly 7 percent of HP’s equity. That’s enough proxy oomph to get HP’s attention, so the company is taking the effort seriously; a delegation from the board, including Lane, was to meet with representatives of the group today.

Below is the group’s original letter outlining certain problems and demands for changes that it wants from HP. Among them is a request for an “independent special master” who would be appointed to investigate the circumstances leading up to the $11 billion acquisition of the British software firm Autonomy. That deal, you’ll recall, famously went south when HP announced that Autonomy assets would account for about $5.5 billion out of a total $8 billion write-down late last year.

The group also demanded that HP sever ties with its auditing firm, Ernst and Young. Specifically, it complains that HP has paid the firm too much in fees unrelated to auditing work, while those same fees at Dell and Apple have been falling, thus giving the appearance of a conflict of interest between different arms of that firm. It goes on to question other factors, such as whether or not Enrst and Young was paying enough attention to the acquisition of EDS, which itself was the target of another $8 billion HP write-down earlier in 2012: “The Audit Committee’s willingness to allow Ernst & Young to perform multiple and conflicting roles for HP severely undermines shareholder confidence in the ability of the Committee as currently constituted to steer an appropriate course in the future. As a result we believe that this relationship must end now, and that HP should immediately begin the process of finding a new external auditor,” the letter reads in part.

Here’s the letter from CtW in full.

CtW HP Letter by Arik Hesseldahl

Just moments ago, Apple issued a statement essentially saying it will comply with the ruling of Manhattan federal judge Richard Sullivan issued earlier today saying the proposal improperly bundled too many terms together into one.

Here’s Apple’s statement in full:

“We are disappointed with the court’s ruling. Proposal #2 is part of our efforts to further enhance corporate governance and serve our shareholders’ best interests. Unfortunately, due to today’s decision, shareholders will not be able to vote on Proposal #2 at our annual meeting next week.”

Einhorn triggered a kerfuffle with Apple a few weeks ago saying the proposal — number two on Apple’s proxy — removed the possibility of perpetual preferred shares from Apple’s corporate charter. He argued such preferred shares — he calls them iPrefs — would be a great way for Apple to distribute more of its massive hoard of cash ($137 billion at last count) to shareholders, beyond the existing dividend. He sued Apple, arguing it wasn’t properly following SEC rules with the proposal, and the judge agreed. Apple CEO Tim Cook had called the lawsuit “bizarre.”

On Thursday, Einhorn’s Greenlight Capital sued Apple over a proxy proposal that would eliminate preferred stock from its charter. And, in a release issued to coincide with the suit, Greenlight urged Apple shareholders to vote against the proposal, which it argues would prevent the company’s board from unlocking shareholder value.

“We believe Apple must examine all of its options to unlock the growing value of its balance sheet for all shareholders,” Einhorn said. “Over the past several months, we have had an ongoing dialogue with Apple regarding one option to do so, namely the creation of a new security, a perpetual preferred stock that would be distributed at no cost to Apple’s existing shareholders, and would provide an attractive, sustainable dividend while preserving Apple’s financial resources to pursue its business strategy.”

With the shares down about 35 percent from a 52-week high of $705 a share, and more than $137 billion in combined cash plus short- and long-term investments, Einhorn argues that shareholders could be getting as much as $32 a share under his preferred stock scheme, though he has not yet explained the math behind that number.

During a CNBC interview this morning, Einhorn likened Apple to his grandmother, accusing the company of having a “Depression-era mentality” about its cash hoard. “Apple is behaving like someone who’s gone through trauma … they sometimes feel they can never have enough cash. … Apple is a phenomenal company filled with talented people creating iconic products that consumers around the world love. But Apple has a problem, we think. It has a cash problem.”

Apple shares rose by $2.36 to $457.06 by 8:35 am PT. The shares have fallen by more than 16 percent since the start of the year.

The proxy proposal over which Greenlight is suing is up for a vote at Apple’s Feb. 27 annual meeting.

Apple did not respond to a request for comment.

Below, Greenlight’s letter to Apple shareholders:

February 7, 2013

VOTE AGAINST PROPOSAL 2 AT THE FEBRUARY 27 ANNUAL MEETING
TO PROTECT YOUR INVESTMENT IN APPLE

Oppose Apple’s Effort To Restrict The Company’s Ability To Unlock Substantial Shareholder Value

Dear Fellow Apple Shareholder,

Greenlight Capital, Inc. (and affiliates, “Greenlight”) has been a significant shareholder of Apple Inc. (“Apple” or the “Company”) since 2010. We believe Apple is a phenomenal company filled with talented people creating iconic products that consumers around the world love. We are long-term shareholders of Apple.

However, like many other shareholders, Greenlight is dissatisfied with Apple’s capital allocation strategy. The combination of Apple’s low (and shrinking) price to earnings multiple and $137 billion (and growing) hoard of cash on the balance sheet supports Greenlight’s contention that Apple has an obligation to examine all options to create and unlock additional value.

We understand that many of our fellow shareholders share our frustration with Apple’s capital allocation policies. Apple has $145 per share of cash on its balance sheet. As a shareholder, this is your money. Though Apple recently commenced paying a common dividend and initiated a nominal share repurchase program, we believe that there is much more that the Board should do for shareholders. We believe that it is important for shareholders to send Apple’s Board the message that the current capital allocation policy is not satisfactory, and that after considering all options, Apple’s Board should act to unlock the latent value of Apple’s balance sheet and franchise. If you share our frustration, please join us in blocking the Company’s effort to restrict its value creation options by voting AGAINST Apple’s plan to amend its corporate charter in Proposal 2 to eliminate preferred stock.

Send Apple And Its Board A Message That We Want Apple To Change Its Capital Allocation
Policy To Unlock Value For Shareholders – VOTE AGAINST PROPOSAL 2

At a May 2012 investment conference, Greenlight introduced the idea that Apple could unlock several hundred billion dollars of shareholder value by distributing to existing shareholders a perpetual preferred stock.

Since then, Greenlight has had discussions with Apple encouraging the Company to distribute perpetual preferred stock as an innovative method of rewarding all shareholders for the Company’s strong balance sheet and substantial cash flows. Put plainly, Greenlight is encouraging Apple to distribute a perpetual, high-yielding preferred stock directly to shareholders at no cost. This would enable shareholders to own and separately trade the new preferred shares and Apple’s existing common shares. Importantly, Greenlight believes these preferred shares represent a simple, low-risk way to reward shareholders without compromising the financial and strategic flexibility of the Company, or forcing the company to incur tax on repatriating its offshore cash balances.

Greenlight suggested an initial preferred share distribution, whereby dividends could be funded on an ongoing basis by a relatively small percentage of the Company’s operating cash flow. Apple rejected the idea outright in September 2012. Yesterday, after Greenlight notified Apple of its intention to vote against Proposal 2, Apple said it would reconsider the idea, but refused to withdraw the proxy provision where Apple seeks to eliminate preferred stock from its charter.

The recent, severe under-performance of Apple’s shares, which are down approximately 35% from their peak valuation, underscores the need for the Company to apply the same level of creativity used to develop revolutionary technology for its consumers to unlock the value of its strong balance sheet for its shareholders.

We believe our suggestion of distributing perpetual preferred stock, while innovative, is also quite simple. Apple could distribute high-yielding, tax efficient preferred stock to existing shareholders at no cost. This new type of easily tradable preferred security would allow Apple to take advantage of the market’s appetite for yield while preserving future operating and strategic flexibility. Importantly, we believe this strategy would require no immediate use of cash other than the ongoing dividend, and would not pose any maturity, re-financing, balance sheet, or default risk.

For example, Apple could initially distribute to existing shareholders $50 billion of perpetual preferred stock, with a 4% annual cash dividend paid quarterly at preferential tax rates. Once a trading market is established and the market recognizes the attractiveness of a highly liquid, steady yielding instrument from an issuer backed by Apple’s unmatched balance sheet and valuable franchise, the Board could evaluate unlocking additional value by distributing additional perpetual preferred stock to existing shareholders. With this conservative action, Greenlight believes the Board could unlock hundreds of billions of dollars of latent shareholder value.

Assuming Apple retains its price to earnings multiple of 10x and the preferred stock yields 4%, our calculations show that every $50 billion of perpetual preferred stock that Apple distributes would unlock about $30 billion, or $32 per share in value. Greenlight believes that Apple has the capacity to ultimately distribute several hundred billion dollars of preferred, which would unlock hundreds of dollars of value per share. Further, Greenlight believes additional value may be realized when Apple’s price to earnings multiple expands, as the market appreciates a more shareholder friendly capital allocation policy.

Apple’s Attempt To Remove A Potential Means Of Value Creation
Should Concern ALL Shareholders

As holders of more than 1.3 million Apple shares, Greenlight is alarmed that Apple is attempting to eliminate preferred stock from its corporate charter, hindering its ability to unlock value for shareholders. This is an unprecedented action to curtail the Company’s options. We are not aware of any other company that has ever voluntarily taken this step. Furthermore, over 90% of the S&P 500 companies have the flexibility to issue similar preferred shares.

Apple is attempting to package this provision with two positive corporate governance reforms that we would normally support. Apple is asking shareholders to approve or disapprove of all three changes in a single bundled vote.

We believe that the Securities and Exchange Commission (“SEC”) proxy rules require that Apple provide for a separate vote on each matter presented to its shareholders for approval at the shareholder meeting. This ‘unbundling’ rule is designed to permit shareholders to express their vote on each individual matter and to not be forced to vote on a combined package of items. This prevents companies from forcing shareholders to approve matters that they might not vote for if presented independently.

In our view, Apple’s Proposal No. 2 violates the SEC’s ‘unbundling’ rule because it ties together three separate matters (majority voting for directors, elimination of preferred stock, and establishing a par value for the Company’s common stock) into one proposal. Apple should be required to unbundle these items into separate proposals to allow the shareholders to make an independent choice on each matter. Accordingly, Greenlight has initiated a legal action in the U.S. Federal District Court for the Southern District of New York seeking to have the Company unbundle the various components of Proposal 2 so that shareholders can rightfully vote on each individual provision as mandated by SEC rules.

We cannot support the two desirable governance reforms at the expense of limiting Apple’s ability to potentially unlock hundreds of billions of dollars of shareholder value. Importantly, in its current form, voting AGAINST Proposal 2 does not affect the ‘majority voting’ reform in the short-term, as Board members have already agreed to resign from the Board if they fail to receive a majority of votes cast “for” their election. As a result, we will vote AGAINST Proposal 2 in Apple’s proxy and we urge you to vote AGAINST the proposal, as well.

Proposal 2 Is Value Destructive, Impedes The Board’s Flexibility,
And Does Not Merit Shareholder Support

Your vote is extremely important, regardless of how many shares you own. Apple shareholders of record as of January 2, 2013 are entitled to vote at the annual meeting. Proposal 2 requires the affirmative vote of a majority of the outstanding shares. If you were an Apple shareholder on the record date, you can still vote AGAINST Proposal 2, even if you already voted your shares.

Greenlight is not asking for your proxy card, so please do not send us your proxy card. If your Apple shares are held in your own name, please vote AGAINST Proposal 2. If you hold your Apple shares in “street name” with a bank, brokerage firm, dealer, trust company or other nominee, only they can exercise your right to vote with respect to your shares and only after receiving your specific instructions. IT IS CRITICAL THAT YOU PROMPTLY GIVE INSTRUCTIONS TO YOUR BANK, BROKERAGE FIRM, DEALER, TRUST COMPANY OR OTHER NOMINEE TO VOTE “AGAINST” PROPOSAL 2. If you have any questions about voting your Apple shares, please call our proxy solicitor, D.F. King & Co., Inc., toll-free at (800) 949-2583 (banks and brokerage firms should call (212) 269-5550), or email apple@dfking.com.

Thank you for your consideration and support.

Sincerely,

David Einhorn
Greenlight Capital

The company’s conference call with analysts is about to begin. Expect some questions from the gallery that test Intel’s assumptions about the state of the PC and server markets and its assumptions about its intentions in the mobile business. And while Intel execs on the call probably won’t say much about any of this, there will be some pressing questions about the state of the search — such as it is — for the next CEO who will take over after current CEO Paul Otellini leaves later this year.

Earlier:
2:11 pm: Joining the conference call in progress. CFO Stacy Smith is reading from his prepared remarks, looking back on the year.

Smith: Spending as percent of revenue was 34 percent. Fourth quarter revenue finished in line with expectations. Worldwide inventory levels reduced as customers reduced their inventory of older PCs.

2:13 pm: Smith: In 2013 we’re expecting revenue growth in the low single digits. Expecting $18.9 billion in spending.

2:14 pm: Smith: As a result of the significant progress we’ve made, I’m optimistic about our long-term prospects. In 2013 we will rev our next-generation tablet chip, Bay Trail for Windows and Android.

Smith: We will start production on the 14-nanometer process this year. This will put us significantly ahead of the competition.

2:16 pm: Moving on to the Q&A session with analysts.

Question from Deutsche Bank: It seems like your Capex and Opex are outgrowing revenues. It looks like investors are dubious about when they’ll see returns on investments. What are the mile markers?

CEO Paul Otellini: You’re seeing our first investments for the 450-millimeter transition for later this decade. (Bigger silicon wafers.) That is more of an extraordinary event that isn’t related to volume in 2014-16. Other than that, it’s about the same as last year. As we finish up the use of the 14-nanometer processes and move to 10-nanometer process, we’re going to need those factories. Regardless of what you think the size of the market is, the fabs (factories) are the most important assets we have.

Smith answering another question on Capex. It’s for building to the peak of 14-nanometer, and starting the early bits of 10-nanometer. Its really for the peak of 2014 and 15. With regard to equipment, the facility-related spend is coming back and it’s for equipment.

2:21 pm: Question on guidance for 2013 revenue, can you walk through underlying assumptions?

Smith: We expect data center group to return to double-digit growth. Cloud data centers and portions of the market like storage and networking. And then for core PC market, we have pretty modest expectations in units. We think growth comes from the devices that sit in the middle. Plus we start to participate in the tablet market.

Is the spending for 450-mm wafers ongoing?

Smith: What changed is, the industry consortium set expectations for the shift, we want to start the construction of a development facility. I expect there’s some spending related, but we won’t get into real capital spending on it until the back half of this decade.

Q: The 10-nanometer spending, does that assume EUV or immersion lithography?

Smith: I’ll save that for the technologists. We’re close to the vest with those details.

2:24 pm: Question: There are some reports about Intel manufacturing some chips for Cisco Systems. Trying to drill down on Intel becoming a specialized foundry, which builds chips under contract.

Otellini: We are very interested in being a selective foundry for certain customers. We don’t expect to be a general purpose foundry. We would not take business that would strengthen a competitor. We have done some announcements in programmable logic, and those companies need a company like Intel to help them. We have been building that capability and we’re now going into production.

Smith: To the extent that we engage with these customers, we want to get paid for it.

Questions about ARM.

Otellini: We’ve looked at the A15, and we’re comfortable that we can maintain a performance lead.

2:27 pm: Another question on the foundry business. Have you earmarked any money for it?

Smith: Other than the three small customers you have heard of, the foundry business is not driving our Capex spending.

Question on PC market guidance. You seem to be guiding them down and making a big bet on 2014. How much do you need to take of tablet share, or how much needs to be eaten by your convertible PCs to make that bet worthwhile?

Smith: I’d take issue with the characterization of PCs guiding down a ton. For the company I said low single digits, data center up in double digits, and you still end up with client (PC) growth in that. The lines are blurring and we are expecting some unit growth. When we get into the back half of the year it’s a fairly reasonable assumption. We expect normal growth, just across a wider range of devices.

2:32 pm: Question on Q4, seems PC client units were down 4 percent. Was this mainly an inventory drain?

Smith: We think there was an inventory drain in the worldwide supply chain for PCs in the first quarter. Our channel checks suggest older Windows 7 systems were burned off in the quarter. When we look at inventory levels, we think it’s a healthy level of inventory. Plus we reduced our own inventory levels.

Q: Any particular dynamic at work regarding average selling prices in the data center group?

Otellini: The big drive was Romley. That helped drive the overall richness. On PCs, we saw strength in the core product line, and more weakness than we thought in the lower end of the market.

Question on potential for hybrids. We’re seeing small tablets. 10-inch tablets are not selling as well. Does that give you an opportunity?

Otellini: Yes. Phones are getting bigger. And the shift to tablets from 10 to seven inches, and that is what you’re going to see. The market will bifurcate between 4- and 6-inch and then 5- and 7-inch products. They only get thinner as Haswell and Broadwell come online.

Question on cash balance. What is the level of cash. Will you have to raise debt again?

Smith: We would certainly look opportunistically as we have been. We generated $6 billion of cash flow from operations, so we’re generating plenty of cash to run the business, to pay the dividend and protect the dividend. I’m comfortable with the cash we have now, and I could live with a little less as well.

Question on an update acquisition of Infineon wireless. Where are you with 4G LTE and an integrated Atom chip? Progress with handsets?

Otellini: Infineon is well on its way to LTE. Dual data and voice mode. First phones early next year. Very competitive solution. The Infineon team is known not for being first to market, but very good, and cost effective. In terms of integrated solutions, expect higher levels of integration next year.

Smith: I’m struck by how hungry the customers (phone makers) are to work with us on this.

2:40 pm: Question on price elasticity in the PC market. Wondering how price drops drive unit growth.

Otellini: I don’t think there’s much elasticity in the classic form factors. What we saw earlier was similar elasticity in desktop in 80s and 90s. It dropped until it reached a point where there was a minimum margin left for all the players.

People will buy based upon their need in those price points. Difficult to see them go from $299 to $99. What we’re likely to see is people willing to spend a little more for a more capable product. We’ve seen it in the Apple model. There is a model of paying for innovation.

2:42 pm: Do you have a view on EUV (Extreme Ultraviolet Lithography)?

Smith: Not prepared to talk about it.

Question: You’re expecting a better than seasonal 2H13.

Smith: That is consistent with our view. The consensus GDP estimates, there is a consistent strengthening of GDP later this year. Haswell gains traction, touch gains traction. We become more represented across Windows tablet and Android across 2013, and that gives us a better than seasonal second half of the year.

Question on regional performance.

Otellini: In China, there were some tablets that impacted some low-end PC sales. Brazil saw some inflation and that affected some PCs sales. China had a regime change, and that affected some sales. China is still outgrowing any large economy in the world. We have been pleasantly surprised by the data center growth in China.

Question on gross margins. They were a little better. Can you share with us your utilization rates in Q4 and what you expect the trajectory to be in Q1 and beyond?

Smith: We came in with gross margins a little better than we expected in Q4. We brought the loadings down in the factories a bit. We redirected some equipment, and brought inventories down by $600 million. We think gross margins are roughly flat. We see continued improvement in excess capacity, and increases in startup costs. Add in some other puts and takes it’s about flat. When we get to Q2 we see further reduction in excess capacity charges, but that is when we will peak in terms of startup costs. So I think Gross margin in Q2 will be flat to down. But we think gross margins later in the year to be closer to low 60s because we’ve guided to 60 percent for the year. Our costs come down over the back half of the year.

2:52 pm: That’s it. Thanks for tuning in! See you in 90 days!

“The narrative lags the reality,” Whitman said in an interview at The Wall Street Journal’s CIO Network conference in San Diego. But the narrative will only change as the company delivers on results that she has promised. Having taken more than $17 billion in combined write-downs for the acquisitions of EDS and Autonomy, 2012 has been portrayed by Whitman and HP CFO Cathie Lesjak as the year during which all the bad news was tackled, and 2013 is to be the year when the arduous work of repairing the company begins in earnest. Whitman sounded a note of confidence: “We’ve got the right people in the right jobs at the right time, and you can feel it. … But we have to be patient.”

Whitman also said that HP “paid too much” for Autonomy, the British software company for which it spent north of $11 billion in 2011. About $5.5 billion of HP’s $8.8 billion write-down announced in November was attributed to that acquisition. Whitman reiterated HP’s argument that Autonomy misrepresented itself, making it appear to be more valuable than it was, and fooled auditors at Deloitte who were vetting Autonomy’s books. “The auditor wasn’t exactly a Brand X auditor, and did you ever dream that the financials would have represented the true financial state of the company?”

Below are some video highlights: