Shares of HP rose by more than 13 percent to $24.09 as of 10:15 am ET. The catalyst was yesterday’s quarterly earnings report that contained better-than-expected profits amid sales that fell short of consensus forecasts by more than half a billion dollars. Analysts this morning are questioning whether or not the company can maintain the veneer of progress toward a turnaround in the quarters ahead.

“Shrinking your way to profitability buys time but doesn’t equal a turnaround,” was the headline on a research note from Chris Whitmore of Deutsche Bank Securities this morning. With revenue down by 10 percent year on year, and sales in major business segments declining between 1 percent (printing) and 20 percent (personal computers), HP’s success this quarter and last appears to have been more about minding its cash flow and costs carefully, and less about selling more of the goods and services that make it money.

“HP is sacrificing market share, delaying research and development investment and the financial benefit of past restructuring actions to support near-term profitability which in our view is not sustainable,” Whitmore wrote.

Whitman explained yesterday, both in a conference call with analysts and in an interview with AllThingsD, that HP walked away from deals to sell PCs and servers that didn’t contain enough profit. It had the result of yielding some of its market share ground — HP leads the world in both PC and server sales — to Dell.

“Unsustainable,” appeared to be the word of the day among analysts covering HP. It also appeared in a note from Goldman Sachs analyst Bill Shope, who reiterated his “sell” rating on HP shares. HP’s exposure to “distressed end markets” will eventually overwhelm whatever actions it may take in the short- to medium term. Brian White of Topeka Capital Markets also maintained a “sell,” advising shareholders that yesterday’s 13 percent after-hours surge on HP’s share price represented an opportunity to do just that.

Hoped-for growth from sales of new products like Project Moonshot and new networking products are good, but even that success may not be enough replace the revenue that’s being lost, worries Evercore analyst Rob Cihra. “Low-power Moonshot servers, higher-end printing and software-defined networking all help but much more seems needed to move such a massive needle,” he wrote in a note to clients today. “Hopes for FY13 stability otherwise just appear to flow from deep restructuring cuts.”

Brian Marshall of ISI presented a similar view in a note to clients: “As global economic growth softens and PCs and printers face secular decline, it will be challenging for large technology vendors such as HP to find significant sources of new growth that can move the needle on approximately $110 billion of annual revenue.”

When surveying analysts on the subject of HP, it doesn’t take long to return to the notion of a breakup. HP is worth more in pieces, the argument goes, than as a unified company. That’s what will happen if HP isn’t able to turn the corner soon enough, argues Toni Sacconaghi of Sanford Bernstein, in a note today. While Sacconaghi has an “outperform” rating on HP shares, based on its prospects for improvement over the next six to nine months — an opinion he explained in detail on CNBC yesterday — he remains convinced that, after that, HP will either fix what’s broken or break itself up.

But in a short phone interview with AllThingsD, CEO Meg Whitman and CFO Cathie Lesjak reiterated what they said on a conference call with analysts: Progress has been made, but there’s still a lot of work to be done.

AllThingsD: Meg, let’s talk about the state of the competitive environment. We heard some pretty tough results from Dell last week, and you said on the call that HP was choosing to pass on some deals in order to protect profit margins. Tell me a little more about that.

Whitman: For the long term, profitability remains a focus for us because we can’t afford to let our profitability crater the way Dell did. We have to have the ability to invest in the next generation of PCs and servers and software. It was a tough quarter. We walked away from several deals and lost some share. But it felt like we did the right thing in going after the deals that were the right deals for us. There were also some execution issues. We have to make sure we have the right product for the right customers at the right price point. And particularly at the low end, I think we could do a better job there. But overall I’m reasonably pleased that we made the right decisions in the PC business.

Dell was also making a lot of noise about industry standard servers and how it took some share away from HP. Was it a similar dynamic in servers as it was in PCs?

Whitman: Yeah. We saw what happened to Dell’s earnings. They were down 75 percent. If they were a publicly held company that was trading freely in absence of a buyout number, the stock would be down by 50 percent. It would be ridiculous. We are a publicly held company and we have to invest in the long haul. So we had to choose to walk away from some deals in hyperscale and industry standard servers and PCs that didn’t make sense for the company. I feel like we did the right thing, but there’s always something you can learn from these things.

How do you feel about competing against a privately held Dell versus a publicly held Dell? We saw some indication of how it might behave in the marketplace this quarter. Do you think you’re going to have more of this aggressive pricing behavior and so on?

Whitman: I don’t know exactly how their behavior is going to change. But remember, they’re loading a lot of debt onto the company. And remember how LBOs work. The key is to pay off the debt quickly so you can take the company public again and make a lot of money. We’ll see if they remain as aggressive as they have been. But frankly, this is just a competitive business. We have a lot of competition. We have shown that we can win over time whether it’s against Acer or other manufacturers that we beat out. So if it’s Dell or anyone else, we have to have continuous improvement. We have to invest in the right products. We have to streamline our go-to-market strategy, we have to constantly refine our supply chain and we have to be more agile. And that is just part of being in the business.

Lesjak: And we’ve shown that by being No. 1 in the market for industry standard servers for many, many years now, and we’ve been competing against Dell that entire time.

Cathie, there was a lot of talk on the call about reducing HP’s debt. Give me a look ahead as to what changes when that debt comes down to approaching zero, then what happens?

Lesjak: It frees us up to step back and look at what we want to do with the cash we’re generating, and we want to make sure we’re making the right kind of investments. Those investments may be in buying back shares, or capital expenditures, or research and development to get us on track for the future, or to make small M&A deals. And we want to evaluate these all on a returns basis, both in the near term and in the long term. Because you really need to do both. Some decisions will be based on the near term and with some we’ll be willing to wait a long time for the returns because they’ll be worth it. This is actually one of those moments when we’re going through a lot of product transitions, where the new style of IT products are coming in and the older style products are going away. And what we really want to be able to do, instead of having to manage big transitions, we want to get through them more quickly and that means that you have to invest for the short term and long term.

Whitman: I’ve been saying this a lot lately: You have to plant acorns before you have oak trees. And I think with a lot of the CEO transitions, we didn’t plant enough acorns. And now we’re paying that price.

So part of the impression I got from this quarter and last is that you’re able to beat the Street expectations in part because you’re able to manage your cash flow very tactically. You did well with cash flow for the first half of the year and you said on the call that you don’t expect it to remain as strong in the second half. With the macro environment remaining so weak, I come away thinking that your success is really less about products and lines of business and right now more about managing and taking out costs. Is that fair?

Lesjak: I’d sum it all up to operational excellence. You have to do this all the time. I mean, we’re in a competitive industry. Margins are tight and you have to be maniacally focused on managing your costs every minute, and making sure you’ve got the right product in the right place at the right time. I think this has to be part of the DNA of the company. There’s no moment when you exhale and then you get to spend more. This is about being focused all the time and bringing that discipline to the company. Now in the second half we have some extraordinary cash payments to make around taxes and restructuring payments. As well as some cap-ex that we think will be good investments for the future.

Is there any indication that the macro environment is going to improve? We’re seeing the worst environment for PCs pretty much ever, and IT spending generally isn’t looking so good. Do you sense any improvement in either?

Whitman: From a macroeconomic perspective, which is what drives IT spending across small businesses, medium ones and big enterprises, I think the environment remains about the same. I could be wrong here. We don’t see any improvement coming in Europe and we don’t see an improvement in the U.S. So we’re not counting on those as tailwinds or headwinds, but really more of the same. PCs are a little different. PCs are a subset of personal systems, and as you know that business is growing generally with all the tablets and mobile devices. It’s possible the PC growth rate doesn’t decline as much. It may continue or it may flatten. The objective is that when it starts to flatten out, whose is the company with the best products and the company best-positioned to gain share. We want it to be us.

Lesjak: Taking advantage of the fact that tablets are a growing segment, you really look at HP’s position in tablets, and that will improve significantly in the second half of this year. We’ve got the Slate 7 Android consumer tablet and the Elitepad commercial tablet. Those ramp in the second half, so we’ll have some help on the top line. Not so much in the PC business but personal systems.

Project Moonshot launched during the quarter and there’s a sense that there’s a lot of hope riding on that product. When does it start shipping in earnest for revenue? Is that a 2014 story?

Lesjak: It really ramps in the second half of this year but it’s more of a 2014 story. The real material benefit is 2014 and 2015. IDC has done some projections that the Web and cloud services business will grow about 19 percent in 2016. So that works out to about 8-10 million servers between now and then. So that’s the market that Moonshot is going after.

Whitman: You also have to remember that the ramp is slower with these enterprise products than with the consumer products. Big enterprises need to bring them in and do a proof of concept and see what workloads they want to run on them. And then they have to prove it out. Enterprises move more slowly, but when they move, they move big. But the ramp is slower than the the consumer product.

What’s your biggest priority for the rest of the year now, Meg?

Whitman: We continue with our restructuring program. We said it was going to be a three-year program, and we’re about halfway through that timeline. So there’s more work to do there. And to Cathie’s point, it becomes part of the DNA. This is what we do in the normal course of business. We also have to manage the transition between the new products and the older products. We’d like to accelerate the growth of the new products if we can.

And you said on the call, despite all these market headwinds, you think you can grow next year.

Whitman: We do. We continue to believe that growth is possible next year. You’ve got to remember, we’re doing this amid some of the biggest transitions that have hit the IT industry in a generation. The macro environment is not going to help. The delayed runoff in enterprise services helps this year but hurts next year. But we think we can grow. It depends on a lot of different factors. To be clear, we expect EPS growth in 2014 regardless.

What’s your latest thinking on Autonomy? Is that part of the operation where it should be?

Whitman: I think Robert Youngjohns and his team have done a great job of stabilizing Autonomy. We’ve put in some systems that were lacking and we’ve changed our go-to-market. We’ve invested in R&D jobs there. We had 50 openings for research jobs there recently and I suspect that most of them have been filled by now. So I’m pleased with the progress. That team went through a lot, so I have to give them a shout-out. They had some difficult circumstances. And I’m pleased with what they’re doing. I think you’re going to see Autonomy grow in the next few quarters.

You still having fun, Meg?

It is fun. The senior team feels like they’re making a difference. The turnaround is on schedule. Obviously there are lessons learned every quarter, but we feel good about where we are.

At the outset, it seems a tall order. Name a significant line of HP’s business and it’s probably in the middle of one sort of fundamental slowdown or another. Whether it’s the historical decline in PC sales, a weak environment for server sales, a lousy market for printers or ongoing difficulties with its enterprise services business, HP has troubles in all four. Together, these troubled units accounted for about 92 percent of HP’s sales last quarter. Add to the mix a significant exposure to Europe, where the economy remains weak, and it becomes incredibly difficult to feel hopeful for a pleasant surprise in HP’s results today.

Whitman and CFO Cathie Lesjak have been clear in past public statements that there are no quick fixes for HP. And its rivals are taking advantage. Dell unleashed a bit of a price war on the PC front, cutting prices aggressively in order to take some market share ahead of its anticipated $24.4 billion go-private transaction.

While Dell is willing to sacrifice profitability, HP doesn’t seem to have responded, and so may have missed some sales. As Chris Whitmore of Deutsche Bank Securities wrote in a note to clients yesterday, “It appears HP is sacrificing share to protect near-term margins.”

Dell has also been bragging about its ability to take market share away from HP on the server front.

What HP has got going for it: Aggressive cost management. Remember that HP surprised the Street with better-than-expected cash flow in the first quarter of the year, giving the appearance that the promised turnaround had begun in earnest. But much of that surprise came from a one-time tax benefit that added a half-billion dollars to operating cash flow. That is unlikely this quarter, so Whitmore is worried that cash flow may come up short: “The combination of cash restructuring payments, headwinds from revenue declines in PCs impacting working capital and cash cycle and the absence of favorable factors in Q1 (tax deferrals, bonus payments, etc) may result in worse than expected cash flow,” he wrote.

Analysts expect HP to report 81 cents per share on sales of $28.12 billion. A miss on either the top or bottom line will probably freak out shareholders impatient to see some tangible sign that, despite having survived the worst year in its history, HP can yet be salvaged, and that Whitman is the one to get the job done. HP shares opened up slightly this morning at $21.21 a share.

I talked about all this a little this morning on CNBC. The video is below:

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.

Earnings per share were at 21 cents, a whopping 14 cents below the consensus view, while revenue, at $14.07 billion, was above the forecast by about a half-billion dollars.

During a conference call with analysts that wrapped up just a little while ago, Dell management struck a tone of sticking to its strategic guns. With the PC market contracting fast, it has gotten selectively aggressive on pricing in order to try and take share away from rivals like Hewlett-Packard and Lenovo. At the same time, the results show growth in expenses like research and development spending that aren’t exactly helping gross margins.

In short, Dell is starting to act a lot more like the privately held company it expects to be before the summer is over, accountable only to its owners.

In their questions, analysts sought to tease out what details they could about the effect of the proposed go-private transaction on things like employee retention and relationships with key customers. CFO Brian Gladden and head of investor relations Rob Williams shot those questions down.

Here’s a summary of the substance of the conference call (all times are Pacific):

1:46 pm: On hold waiting for the conference call to begin with what sounds like some Vivaldi playing in the background.

And now things are getting under way.

Standard conference call boilerplate from head of investor relations Rob Williams.

Brian Gladden is speaking. “We continue to invest in strategic capabilities.” He’s talking about the acquisition of Entratius, which closed last week.

Gross margin was down 40 basis points sequentially.

“We continue to face a competitive pricing environment … and this has affected our profitability.”

Selling and general costs were up 4 percent.

R&D spending is up 33 percent.

Gladden: There were almost $90 million worth of expenses related to the go-private transaction that were excluded from the non-GAAP figures.

1:54 pm: Tom Sweet is talking about business segments. Here comes the news on server sales that Michael Dell said was going so well.

Servers, Networking and Peripherals saw sales grow by about 10 percent, but sales of storage fell about 10 percent.

Sweet: “Dell powers four out of the top five search engines and 75 percent of the top social media sites worldwide.”

Sweet is covering a few customer wins. And now he’s on to software. Revenue was $295 million and had an operating loss of $85 million. “We remain confident that the Quest acquisition (which was $2.4 billion) will be accretive by FY 2015.

Sweet is talking about End User Computing, a.k.a. the PC segment, and says the environment continues to be competitive. The plan is to try and cut $1 billion out of operating costs by 2015. But customers are “diverting spending to alternative mobile solutions.” Does he mean iPads? Yup.

2:01 pm: Sweet is talking about a big PC win with Marsh and McClennan that has 55,000 seats. “We won despite a key competitor that was a longtime incumbent.” Who? HP maybe?

Question and Answer session is getting underway. First is Katy Huberty from Morgan Stanley. “Can you step back and say if the margin decline is what you expected when you rolled out the more aggressive pricing strategy?”

Gladden: We’ve been talking about this for a few quarters, the need to adjust pricing. There are parts of the business where we are beginning to see some elasticity. Demand has been weaker than expected. These are accounts that we’re gaining that we feel good about their profitability. We feel for the long term we think it’s the right thing to do. If you look at the share dynamics, we did improve our share position in a market that is pretty tough.

A question from Tony Sacconaghi of Sanford Bernstein: Is there a minimum level of profitability that you are willing to sustain in an effort to hold or gain share? Also a question about cost-cutting.

Gladden: Without providing details of specific initiatives, we have continued to take cost out of the business. We are choosing to reinvest those dollars in sales and R&D. I think those things are going on concurrently. (Essentially what he’s saying is that Dell is acting like it’s a private company already.)

As Gladden is speaking I’m looking at the slide presentation. The worst geographically was Asia-Pacific, where sales fell 12 percent year on year. Ouch. Sales in the Americas were up slightly. The BRIC countries fell 17 percent, led by China which fell 24 percent. Super ouch.

Maynard Um: Are customers holding out given the go-private transaction?

Gladden: The customer base has been very supportive of the company. For the conversations I have been a part of they have resulted in many opportunities for the company.

FYI Dell share price update: In after-hours, Dell is trading at $13.37, which is 28 cents below the $13.65 that Michael Dell and Silver Lake have offered shareholders to take it private.

2:11 pm: Question from Steve Milunovich from UBS. He’s asking about changes in sales model on PCs that’s expected as Dell goes private.

Gladden: I wouldn’t say our strategy has changed at all. We’ve adjusted our pricing accordingly and expanded our offerings across the portfolio. This is not a new strategy or business model for us. It’s adjusting tactics given where the market is going.

Question from Credit Suisse: In terms of pursuit of new PC customers, have you put the investments in that you need to or is there more effort to come through?

Gladden: Basically says the strategy hasn’t changed.

Question from Deutsche Bank, asking about servers and the storage business. Servers are good but he says storage doesn’t seem to be getting good attach rates.

Gladden: With servers, we’re winning in the marketing. And when you look at density-optimized servers, we’re winning. We feel good about the server business. You don’t see us trading price for growth there.

About storage. We feel like that business is growing with the market. It’s shrinking with the market. That is not what we’d like to see, obviously. We’re working on it. We’ve added commercial resources over the the last 18 months. We feel positioned to out perform the market.

Question from Keith Bachmann at BMO: How might the M&A strategy differ if the go-private transaction happens? Also about employee retention during the transaction.

Rob Williams: No answer to the first question.

Gladden: Attrition has been about normal for us.

Another question: Does the PC market get softer or better over the next four to six quarters?

Gladden: There are multiple dynamics playing out. There’s a lot driving a refresh cycle. We see improvements in corporate and SMB segments. But we see consumer and government, not so good. Windows 8 has not been the catalyst to growth that we hoped it would be. (That’s a big admission.) You look at recent external data, and we would expect to see over the next few quarters declines in PC demand. We’re trying to run the business based on that.

2:22 pm: Can you update us on the peformance of Quest in the quarter?

Gladden: It’s progressing as expected. We expect it to be accretive in the first fiscal quarter of next year. (Or a year from now.)

Question from Bill Shope of Goldman Sachs, about the PC pricing reductions: Which accounts are the ones that get the discounts? Where do you draw the line on profit vs. market share?

Gladden: We know where long-term strategic accounts are. In many cases those are accounts we’ve had before and have walked away from. I think we’ve been selective. There are clearly some unit volume opportunities where we can sell a lot of units, but they don’t create any profit benefits.

2:29 pm: One last question, this one on support and deployment revenue, which was up.

Tom Sweet: We’re happy with the attach rate there. The team has seen some good things with support products. We’ve been able to keep the attach rate relatively high. Despite downward pressure, it will be a good business.

Gladden: We think that’s a good business on the enterprise side, too.

And that ends the call. Thanks for tuning in!

Earnings on a per-share basis were 21 cents on sales of $14.07 billion. That’s versus a pre-leak consensus of 35 cents on sales of $13.5 billion. Sales were obviously better than expected, but profits were substantially lower.

On a year-over-year basis, sales fell 2 percent. Profits on a non-GAAP basis fell 51 percent. The fall was led by end-user-computing, Dell’s mainstream PC business. Sales there fell 9 percent, and the unit’s operating margin fell 65 percent. That’s where the pain point is.

Enterprise sales grew by about 10 percent to $3.1 billion. Services revenue grew to about 2 percent. Software sales were $295 million but that unit ran at an operating loss.

Here’s Dell’s original announcement:

Dell Reports Fiscal Year 2014 First Quarter Financial Results

Revenue of $14.1 billion
Enterprise Solutions, Services and Software revenue up 12 percent
GAAP earnings of $0.07 per share; non-GAAP earnings of $0.21 per share

ROUND ROCK, Texas–(BUSINESS WIRE)–

Dell today announced fiscal 2014 first quarter results, with revenue of $14.1 billion, as the company grew revenue from Enterprise Solutions, Services and Software 12 percent year over year to $5.5 billion, or 8 percent growth, excluding the acquisition of Quest Software. Pricing adjustments that affected gross margins and continued acquisition-related costs in the quarter resulted in GAAP earnings of $0.07 per share and non-GAAP earnings of $0.21 per share.

“We made progress in building our enterprise solutions capabilities in the first quarter and are confident in our strategy to be the leading provider of end-to-end scalable solutions,” said Brian Gladden, Dell chief financial officer. “In addition, we have taken actions to improve our competitive position in key areas of the business, especially in end-user computing, and it has affected profitability. We’ll also continue to make important investments to support our strategy and drive long-term profitability.”

Results

Revenue in the quarter was $14.1 billion, a 2 percent decrease from the previous year.

GAAP operating income for the quarter was $226 million, or 1.6 percent of revenue. Non-GAAP operating income was $590 million, or 4.2 percent of revenue.

GAAP earnings per share in the quarter was 7 cents, down 81 percent from the previous year; non-GAAP EPS was 21 cents, down 51 percent.

Cash used in operations in the quarter was $39 million. On a trailing, 12-month basis, Dell has generated $3.4 billion in cash flow. Dell ended the quarter with $13.2 billion in cash and investments.

 
Information about Dell’s use of non-GAAP financial information is provided under “Non-GAAP Financial Measures” below. Non-GAAP financial information excludes amortization of purchased intangibles, severance and facility-actions, acquisition-related charges, costs incurred in Fiscal 2014 related to Dell’s proposed merger, and other items. All comparisons in this press release are year over year unless otherwise noted.

Operating Segments Summary:
As previously announced, Dell has realigned its global operating segments to its end-to-end solutions portfolio in the Enterprise Solutions Group, Dell Services, Dell Software Group, and End User Computing Group.

Enterprise Solutions Group revenue was $3.1 billion, a 10 percent increase. Operating income for the quarter was $136 million, a 71 percent increase. Dell server and networking revenue increased 16 percent as the company gained share in the calendar first quarter. Dell networking continued to deliver strong growth, with a 24 percent revenue increase, including a 46 percent growth in the company’s Force10 business. Dell storage revenue declined 10 percent.

Dell Services revenue grew 2 percent to $2.1 billion driven by an 11 percent increase in revenue for infrastructure, cloud and security services. Support and deployment revenue increased 2 percent and applications and business process services declined 15 percent. Operating income was $370 million, a 10 percent increase.

Dell Software revenue was $295 million, resulting in an operating loss. Dell enhanced its software capabilities during the quarter, investing in additional sales capability and research and development. Consistent with the company’s business strategy when it acquired Quest Software, this business is on track to be accretive to earnings in the first quarter of fiscal year 2015.

End User Computing revenue was $8.9 billion in the quarter, a 9 percent decrease. Operating income for the quarter was $224 million, a 65 percent decrease. Dell desktop and thin-client revenue declined 2 percent, mobility revenue declined 16 percent, and software from third parties and peripherals revenue declined 6 percent.

Company Outlook:
Given the company’s announcement on Feb. 5 of a definitive merger agreement to take Dell private, the company is not providing an outlook for the fiscal 2014 second quarter.

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.”

I’ll have more in a minute, but for now here’s the list of names, as taken from the letter just made public in a filing with the U.S. Securities and Exchange Commission. Icahn and Southeastern appear to have nominated six directors each.

On May 13, 2013, Longleaf Partners Fund delivered a letter to the Issuer notifying the Issuer that it intends to nominate the following six persons (the “Southeastern Nominees) as nominees to the Board of Directors of the Issuer at the Issuer’s 2013 Annual Meeting of Stockholders or any other meeting at which Directors may be elected:

Matthew C. Jones
Bernard Lanigan, Jr.
Rahul N. Merchant
Peter van Oppen
Howard Silver
David A. Willmott

In addition, the Icahn Parties (as defined herein) have informed Southeastern that the Icahn Parties intend to submit a notice to the Issuer on May 13, 2013 to nominate the following six persons (the “Icahn Nominees”) as nominees to the Board of Directors of the Issuer at the Issuer’s 2013 Annual Meeting of Stockholders or any other meeting at which Directors may be elected:

Carl C. Icahn
Harry Debes
Dr. Rajendra Singh
Gary Meyers
Daniel Ninivaggi
Jonathan Christodoro

Update: Here’s some very brief biographical information on who the are:

Lanigan is the Chairman, CEO and co-founder of Southeastern Management.

Merchant was last year named the first Chief Information Officer of New York City. He’s also a former CIO at Fannie Mae.

Van Oppen is a partner in Trilogy Equity Partners, a Bellevue, Wash.-based VC firm founded by former T-Mobile USA CEO Peter Stanton that specializes in wireless investments. He’s also a former CEO of Advanced Digital Information Corp., a storage company.

Silver is the former President and CEO of hotel chain Hampton Inn Equity Inns, a hotel chain that was sold to an investment fund in 2007.

Willmott is President and COO of Blount International, a manufacturer of farm and agricultural equipment based in Portland, Ore.

Carl Icahn: Activist investor, head of the Icahn Enterprises.

Debes is the former CEO of Lawson Software, now a unit of Infor.

Meyers is the CEO of a software company called FusionOps, and the former CEO of Synplicity, a company that makes software to design a type of chip known as a field programmable gate array. It’s now a part of Synopsys.

Ninivaggi is the president and CEO of Icahn Enterprises.

Christodoro is a managing director at Icahn Enterprises.

Jones is the CEO of EOS Climate, a technology and service company specializes in the management and destruction of refrigerants. Before that he was CEO of CloudShield, a cyber security outfit.

Update: I added bio information for Jones and made some corrections to the information about Silver. I also added a little more info on Merchant.

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.

On Friday afternoon, Dell gave an interview to the trade publication CRN (which used to be called Computer Reseller News) crowing about his company’s apparent share gains in the market for servers.

What got him excited was preliminary data (as in, not yet published) from the market research firm IDC, which followed similar findings from another research firm, Gartner (again, not yet published), that supposedly shows healthy gains for Dell and big losses at HP.

According to the numbers Dell shared with CRN, IDC found Dell — No. 2 in the worldwide server market — to have grown its share of the server market to nearly 28 percent, while HP’s fell from north of 35 percent a year to slightly below 31 percent. “HP is losing share at a staggering rate, and they are losing it to Dell,” Dell proclaimed.

HP, which had led the segment for the better part of two decades, didn’t respond to Dell’s claims. But it did respond a day earlier, after Dell enterprise chief Marius Haas gave a similar interview — again to CRN — claiming similar data from Gartner. “One quarter does not a trend make. … 17 years is a trend,” retorted Jim Ganthier, a marketing exec in HP’s server group.

Dell hasn’t bothered to wait for either research firm to finalize and publish their data, and I’ve asked both firms to comment on that. I’m no expert in the processes these firms follow, but from what I understand, execs at companies like Dell, HP and IBM see these “preliminary” figures before they get published in order to give the company a chance to dispute them if they vary from what’s really going on. When Gartner and IDC get around to publishing press releases, expect Dell to make a second push on this topic, and maybe give more interviews.

Dell naturally has an urge to pounce on HP and score a few punches. HP has been using the occasion of Dell’s $24.4 billion leveraged-buyout plan to create uncertainty among Dell customers. Way back on Feb. 5, when the buyout plan was first floated, HP issued a statement saying, “Leveraged buyouts tend to leave existing customers and innovation at the curb. We believe Dell’s customers will now be eager to explore alternatives, and HP plans to take full advantage of that opportunity.”

With IBM said to be in on-again, off-again talks with China’s Lenovo to sell its industry-standard server business, and Dell going private, HP is arguing that it is the one major vendor not engaged in a significant corporate shake-up, and thus able to focus most on its customers’ needs. Indeed, HP’s Dave Donatelli led a major Webcast with HP partners last week, touting that very message.

Neither company’s shares are really responding to any of the trash-talking today. HP shares are up slightly this morning to $20.76 a share, while Dell shares are also up a little to $13.35, or about 30 cents below the $13.65 buyout price that Michael Dell and private-equity firm Silver Lake have offered to take the company private.

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.)

That was the conclusion Blackstone Group LP reached about Dell Inc. after it set a small army off to decide whether the private-equity firm should bid for the computer maker.

Blackstone on Thursday told a special Dell board committee negotiating a sale of the company that, after weeks of review, it wouldn’t be moving ahead with a bid. It cited an “unprecedented” decline in PC sales and Dell’s “rapidly eroding financial profile.”

Read the rest of this post on the original site »

Blackstone had been putting together a bid for Dell to trump the $24.4 billion offer from founder and Chief Executive Michael Dell and private-equity firm Silver Lake Partners. Blackstone’s offer would have kept part of the company in the hands of public shareholders.

Read the rest of this post on the original site »

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.

Writing in a research note issued to clients today, Milunovich reduced his forecast on Dell’s per-share earnings by 40 cents to $1.30, but left his “neutral” rating on the stock intact. “The proxy shows a financial plan for F2014 with lower profit than we and the Street currently model due to PC pricing pressure and required investments,” he wrote. “We … project a down year in F15 based on continued growth in. We underestimated the investments needed to become an enterprise player.”

Prior to announcing its $24.4 billion buyout plan in which Michael Dell and private equity firm Silver Lake Partners, with $2 billion in loans from Microsoft, are seeking to buy out Dell shareholders at a price of $13.65, the company’s plan had been to diversify its business away from personal computers and embrace enterprise IT, including servers, storage, services and software. Acquisitions, among them Quest Software, Compellent, Wyse Technologies and others, haven’t injected the sort of growth initially expected, Milunovich writes.

“Based on Mr. Dell’s plans, profit could be down in fiscal year 2015 even on higher revenue if the company prices aggressively in PCs and continues to invest in enterprise computing at the rate he appears to propose,” Milunovich writes. “Whether Dell would be as aggressive a spender if it stays public remains to be seen.”

Earlier this week, Dell revealed in agonizing detail the arduous months-long process leading up to last month’s $24.4 billion offer by CEO Michael Dell and the private equity firm Silver Lake Partner to take the company private.

Friday’s long-awaited proxy filing by the once mighty Texas computing giant leaves no miniscule step in the process undocumented, starting with the earliest suggestions of such a transaction last June by someone at Southeastern Asset Management, Dell’s largest institutional shareholder, all the way to the preliminary offers made earlier this month by the private equity firm Blackstone and the well-known activist investor Carl Icahn.

The special committee of Dell’s board of directors, charged with overseeing the buyout process as well as the go-shop period that ended a week ago, has said that the interest drawn from Blackstone and from Icahn may turn out to be superior.

But also buried within the 274-page filing are lots of clues that the bidding process has less to do with any concrete plans to turn around a deeply troubled tech company and more to do with making a few private equity firms look powerful and, of course, make money in the process.

And, more to the point, not much yet has to do with what it will take to fix Dell and transform it to face the challenges of the new era of computing. In its document, the company outlined its troubles in detail via a variety of voices — including Dell’s CFO — essentially describing a troubled company in a declining market.

Instead, it’s now solely about the art of the deal. That’s no surprise.

If consummated, a Dell buyout would be a huge private equity transaction, the biggest since 2007, and more than three times the size of the largest buyout deal of 2012.

Also no surprise: As the second largest private equity player according to research firm Private Equity International, Blackstone certainly has to appear to be making a move on Dell.

But here’s the hint that its offer — which is as yet only preliminary and nowhere near final — is being made in part for the sake of appearances. Blackstone requested — and Dell’s special committee granted — that its transaction-related expenses be reimbursed, up to a limit of $25 million.

In other words, Blackstone can make a bid for free and its managers will be able to argue to its limited partners that it took a plausible shot at Dell, even if it misses.

Here’s the relevant section from page 45 of the proxy:

In connection with its submission of the Blackstone Proposal, the Blackstone consortium informed the Special Committee that it was not willing to proceed with its evaluation of the transaction contemplated by the Blackstone Proposal unless, prior to 5:00 p.m. Eastern Time on March 28, 2013, it received an agreement from the Company to reimburse the Blackstone consortium’s out-of-pocket expenses in connection with its evaluation of a possible transaction with the Company and an acknowledgment from the Parent Parties, the SLP Investors and Mr. Dell that such an agreement would not violate the merger agreement.

And later on page 46:

On the morning of March 25, 2013, the Company and Blackstone entered into an amendment to Blackstone’s confidentiality agreement providing that the Company will reimburse the transaction-related expenses of Blackstone and its affiliates up to a cap of $25 million.

This kind of thing can be common — it’s worth noting here, too, that the same $25 million cap applies to the Michael Dell/Silver Lake partnership. That said, there’s no mention made of a similar reimbursement agreement with Carl Icahn.

In any case, the Blackstone bid is definitely making for good theater — Wall Street-starring bidding wars always do.

That has included, for example, the whispered-to-media news that Blackstone was considering offering the CEO job to Oracle president and former Hewlett-Packard CEO Mark Hurd, even though the high-profile exec was actually never interested.

Other names will surely surface as the game of thrones continues. But, in reality, much of the action will have to center on Michael Dell, who owns about 16 percent of the company that bears his name, making his cooperation with any bidder pretty much required. And, for now, he appears to want to stay on as CEO.

That’s perhaps why Blackstone backed off alternate leadership suggestions, and Dell, showing that he can keep an open mind, has since met with Blackstone several times this month.

Hanging as a backdrop to all this is a closely watched antitrust lawsuit in a federal court in Boston against several private equity firms including Blackstone and Silver Lake. The plaintiffs are a group of shareholders in publicly traded companies that were bought out by several private equity firms between 2003 and 2007. They argue that they lost money because the buyout firms conspired with each other not to bid against one another and thus inflate prices. As evidence, they cite email messages between executives of the firms that give the appearance of an understanding between them. Earlier this month, a judge narrowed the case’s scope but allowed the lawsuit to proceed. (See a PDF of the original complaint here.)

As Reuters columnist Jeffery Goldfarb argued earlier this week, the appearance of Blackstone’s bid improves what Wall Street players often refer to as the “optics” of the deal. He even went so far as to call it “a Potemkin fight,” and one that Silver Lake might welcome. Headlines about a high profile “bidding war” between two of the defendants in the case won’t hurt their assertion that they weren’t cooperating on deals years ago.

Another player in the drama: Investment bank Evercore Group. Tapped by Dell’s special committee to run the go-shop process and scour the world seeking a potentially “superior offer,” page 52 of the proxy shows that it stands to be paid as much as $30 million in fees for its work, “… the substantial majority of which is contingent upon the Company’s [Dell] entering into a definitive agreement for a ‘superior proposal.’”

That’s a sizable payday, and page 42 of the proxy outlines just how eager Evercore has been to earn it:

“During the go-shop period, Evercore contacted a total of 67 parties, including 19 strategic parties, 18 financial sponsors and 30 other parties, including sovereign wealth funds, to solicit interest in pursuing a possible transaction. Evercore also received unsolicited inquiries regarding a possible transaction from four additional parties, including two strategic parties and two financial sponsors. Of the 71 total parties with which Evercore communicated, the 11 parties discussed below expressed interest in evaluating a possible transaction.”

Obviously, there are many more steps to play out in the process before Dell shareholders vote on the matter this summer. Shareholders may in time be rewarded for their patience in holding on to Dell stock, and will be paid a premium for shares that were worth a lot less a year ago.

But make no mistake: There’s a lot of money being made on the deal process itself.

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

The private-equity firm is competing against an offer from Mr. Dell and private-equity firm Silver Lake Partners to take the company private. Hedge-fund investor Carl Icahn also made a proposal for Dell late last week, and a special committee of Dell shareholders is reviewing the offers.

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Carl Icahn, in a letter you can read below, is offering as much as $15 a share for about $2 billion worth of the company. His offer includes a $5 billion equity commitment, and another $2 billion in additional financing on top of shares already owned. Icahn made a significant purchase said to amount to as much as 6 percent of Dell’s shares outstanding earlier this month.

Blackstone is leading a group that includes Insight Venture Partners and Francisco Partners in offering at least $14.25 a share for Dell. Current shareholders would be allowed to hold their current stakes subject to caps, and those remaining shares would continue to be traded on the Nasdaq exchange.

One interesting observation about the Blackstone offer: Insight Venture Partners was involved earlier this year in a bidding war with Dell over the software company Quest. Insight had sought to take Quest private, but Dell stepped in with an offer during its go-shop process, and ultimately outbid Insight. It’s kind of ironic that Insight is teaming up with Blackstone to make an offer for Dell at the close of its own go-shop process.

Here’s Dell’s original statement, which includes the letters from Blackstone and Icahn:

Dell Special Committee Receives Two Alternative Acquisition Proposals in “Go-Shop” Process

ROUND ROCK, Texas–(BUSINESS WIRE)–
The Special Committee of the Board of Dell Inc. (DELL) today announced that the “go-shop” period provided for in the merger agreement between the company and entities owned by Michael Dell, Dell’s Founder, Chairman and Chief Executive Officer, and investment funds affiliated with Silver Lake Partners, has elicited two alternative acquisition proposals. One proposal was submitted by a group affiliated with a private equity fund managed by Blackstone and the other by entities affiliated with Carl Icahn. Both proposals are attached.
The Special Committee, consisting of four independent and disinterested directors, has determined, after consultation with its independent financial and legal advisors, that both proposals could reasonably be expected to result in superior proposals, as defined under the terms of the existing merger agreement. Therefore, each of the Blackstone and Icahn groups is an “excluded party” and the Special Committee intends to continue negotiations with both.
The Special Committee also noted that Michael Dell has confirmed to the Committee his willingness to explore in good faith the possibility of working with third parties regarding alternative acquisition proposals.
Alex Mandl, Chairman of the Special Committee, said, “We are gratified by the success of our go-shop process that has yielded two alternative proposals with the potential to create additional value for Dell shareholders. We intend to work diligently with all three potential acquirers to ensure the best possible outcome for Dell shareholders, whichever transaction that may be.”
Pursuant to the existing merger agreement, subject to certain requirements, the Special Committee has the right to terminate the agreement in order to accept a superior proposal. The Special Committee has not determined that either the Blackstone proposal or the Icahn proposal in fact constitutes a superior proposal under the existing merger agreement and neither is at this stage sufficiently detailed or definitive for such a determination to be appropriate. There can be no assurance that either proposal will ultimately lead to a superior proposal. While negotiations continue, the Special Committee has not changed its recommendation with respect to, and continues to support, the company’s pending sale to entities controlled by Michael Dell and Silver Lake Partners.
Prior to entering into the existing merger agreement, the Special Committee undertook a rigorous process, over a period of more than five months, to evaluate Dell’s risks, opportunities, and strategic alternatives. These alternatives included continuing with or modifying the company’s existing business plan, implementing a leveraged recapitalization, changing the dividend policy, and potentially selling all or parts of the business.
As a result of that process, the Special Committee unanimously determined that the sale of the company at a premium would be the best alternative for stockholders, and negotiated aggressively to ensure that stockholders receive the highest possible value, including securing provisions for a robust “go-shop” process. The result was that a number of strategic and financial parties entered into confidentiality agreements with the company and Blackstone and Icahn submitted proposals.
The price of $13.65 per share in cash to be paid pursuant to the existing merger agreement provides value certainty at a 37% premium to the average price for the 90 days before rumors of the transaction surfaced. The Committee noted that the Silver Lake Partners raised its bid six times by a total of approximately $4 billion, or over 20%, during the course of negotiations.
Subject to applicable laws and regulations, the Special Committee undertakes no obligation, to provide updates or make further statements regarding the proposals received from Blackstone or Icahn, any revised proposals that may be received from either of them or the status of discussions with either of them, unless and until a definitive agreement is reached or such discussions are terminated.
The alternative acquisition proposals received from Blackstone and Icahn follow here:
BLACKSTONE PROPOSAL
Boulder Acquisition Corp.
c/o Blackstone Management Partners L.L.C.
March 22, 2013
STRICTLY PRIVATE AND CONFIDENTIAL
Special Committee of the Board of Directors of Dell Inc.
One Dell Way
Round Rock, Texas 78682
Attention: Alex Mandl, Presiding Director

Re: Acquisition Proposal and Request for Designation as “Excluded Party”

Dear Mr. Mandl:
On behalf of Boulder Acquisition Corp. (“AcquisitionCo”), Blackstone Management Associates VI L.L.C. (in its capacity as general partner of Blackstone Capital Partners VI L.P.), Francisco Partners III, LP, Insight Venture Management, LLC and each of their respective affiliates, affiliated funds and limited partners (all such persons and entities, together with AcquisitionCo, being collectively referred to herein as the “Investor Group”), we hereby submit this Acquisition Proposal and request prompt designation of the Investor Group as an Excluded Party, as such terms are defined in the Agreement and Plan of Merger by and among Dell Inc., a Delaware corporation (“Dell”), and the Parent Parties (as defined therein) dated as of February 5, 2013 (the “Merger Agreement”).
Thank you for allowing us the access to management and data that we needed to complete a preliminary review of the Dell business. We believe there is significant upside in the Dell businesses, we see significant upside in the value of Dell’s shares, and our proposed transaction structure (described below) will deliver significantly greater value to your shareholders than the value agreed to in the Merger Agreement.
As a result, we would like to proceed in the process to acquire Dell and hereby submit, in accordance with the terms of the Merger Agreement, this Acquisition Proposal. Subject to confirmatory due diligence and negotiation of a mutually agreeable merger agreement (which we expect to include substantially similar terms and conditions as the Merger Agreement, other than certain changes to mechanical provisions required to implement the structure of our Acquisition Proposal as described below), we are prepared to enter into a definitive agreement to acquire Dell in a leveraged recapitalization transaction where shareholders could choose to receive either all cash or stock (subject to a cap), in each case valued in excess of $14.25 per share, representing a Superior Proposal to the $13.65 cash purchase price agreed to in the Merger Agreement.
We are prepared to invest the time and resources necessary to complete a transaction along an expedited timeline, and we would contemplate providing drafts of a definitive transaction agreement (which will include financing commitment letters), along with our more detailed proposal as soon as possible following the completion of satisfactory due diligence.
KEY FEATURES OF OUR PROPOSAL
Our Acquisition Proposal contemplates a leveraged recapitalization transaction with the following features:
Shareholders who wish to receive cash will have the opportunity to receive greater than $14.25 in cash per share for all of their shares.
Shareholders who wish to participate in the ongoing upside of the company will have the opportunity to remain as shareholders and receive shares (subject to a cap) valued in excess of $14.25, which shares would continue to be publicly traded on the Nasdaq.
Our proposed transaction would have several important benefits for Dell shareholders:
Higher price per share for shareholders electing to receive cash
Shareholder friendly structure, with the ability to choose cash or stock
Leveraged upside for shareholders who elect to remain as shareholders
FINANCING
We intend to fund the transaction using a combination of equity and debt financing, in addition to Company cash and cash equivalents. We plan to invest equity amounts in excess of those new equity amounts contemplated by the Merger Agreement to facilitate the proposed transaction.
Based on discussions with equity co-investors, certain strategic partners, and debt financing sources, we are highly confident that financing can be arranged, which will include comparable debt sources and structures as the existing deal. We are currently working with Morgan Stanley & Co LLC (“Morgan Stanley”) as our lead debt financing source to prepare financing, and have had discussions with other debt financing sources that have indicated a strong interest to finance our Acquisition Proposal. We have received from Morgan Stanley a “highly confident” letter related to our ability to raise the required debt financing for this transaction. Upon designation of the Investor Group as an Excluded Party we expect to finalize discussions with other financing sources on an expedited basis. Additionally, at the time of execution of definitive agreements with respect to our proposal, we expect to provide binding financing commitments from debt and equity financing sources in the form customary for a transaction of this type.
We have held discussions with some of Dell’s largest shareholders, and we anticipate inviting them, certain of Dell’s other shareholders and certain other strategic and financial partners to participate in the transaction as part of our group. We would also expect to encourage (but would not require) the MD Investors (as defined in the Merger Agreement) to participate in our transaction by rolling over equity held by the MD Investors.
TIMING
We have significant experience structuring and consummating transactions of this nature, and we believe we can complete our due diligence review and negotiate the terms and conditions of a Superior Proposal (as defined in the Merger Agreement) quickly during the next phase of the process. Given our due diligence to date, we anticipate that the remaining due diligence would focus on key business, accounting, legal and regulatory matters and could be completed quickly, assuming full cooperation of Dell and its advisors. As part of this process, we would expect to have full access to the senior management team of Dell, certain other key employees, Dell’s independent accountants and Dell’s records, financial and operating data and material agreements (including the schedules attached to the Merger Agreement).
We are committed to continuing to pursue a transaction on the terms herein, which we believe will provide a more compelling value proposition to Dell and its shareholders than currently provided under the Merger Agreement. We believe that this proposal meets all applicable requirements under the Merger Agreement to enable the Special Committee to determine that the Investor Group is an Excluded Party in accordance with the Merger Agreement. Due to the considerable time commitment and uncertainty of outcome, we will continue our due diligence and work toward providing a definitive proposal, only upon receipt of written confirmation from the Special Committee of the Board of Directors that the Investor Group has been determined to be an Excluded Party in accordance with the Merger Agreement.
GENERAL
The proposal contained in this letter constitutes an indication of our interest in pursuing a transaction and does not constitute a binding offer, agreement or agreement to proceed with the transaction or to otherwise make a binding offer or agreement at any point in the future.
This indication of interest is submitted by us for review and consideration by the Special Committee of the Board of Directors of Dell on a confidential basis, and the existence of our discussions and this letter (other than such disclosure obligations outlined in the Merger Agreement) shall be kept strictly confidential in accordance with the terms of that certain letter agreement by and between Blackstone Management Partners L.L.C. and Dell, dated February 22, 2013.
This letter shall be governed by and construed in accordance with the laws of the State of Delaware without regard to the conflicts of law principles thereof.
This proposal will expire at 5:00pm (NY time) on March 28 if you fail to provide the written confirmation discussed above prior to such time.
Please do not hesitate to contact any of the team members listed below with any questions.
Sincerely Yours,
BOULDER ACQUISITION CORP.
By: /S/
Name: Chinh E. Chu
President

Blackstone Management Partners L.L.C.

Chinh E. Chu
David Johnson
Senior Managing Director
Senior Managing Director

Morgan Stanley & Co. LLC

Robert A. Kindler

Vice Chairman

Kirkland & Ellis LLP

David Fox
Daniel Wolf
Partner
Partner

cc: Evercore Group L.L.C

ICAHN PROPOSAL
Carl C. Icahn
Icahn Enterprises LP
767 Fifth Avenue
Suite 4700
New York, New York 10153
March 22, 2013
Special Committee of the Board of Directors of Dell Inc.
Dell Inc.
One Dell Way
Round Rock, Texas 78682
James B. Lee, Vice Chairman
JPMorgan Chase
270 Park Avenue
New York, New York 10017
William O. Hiltz
Naveen Nataraj
Evercore Partners
55 East 52nd Street
New York, New York 10055
Jeffrey J. Rosen
Michael A. Diz
Debevoise & Plimpton
919 Third Avenue
New York, NY 10022
Re: Acquisition Proposal for Dell Inc. (“Dell”)
Dear Members of the Special Committee of the Board of Directors of Dell and Advisors:
On February 5, 2013, Dell entered into a merger agreement (the “February 5 Merger Agreement”) with certain entities affiliated with Silver Lake Partners and Michael S. Dell. Capitalized terms not otherwise defined in this letter shall have the meanings ascribed to such terms in the February 5 Merger Agreement. Section 5.3 of the February 5 Merger Agreement provides, among other things, that Dell, its Subsidiaries and its Representatives have the right to initiate, solicit, encourage and receive Acquisition Proposals with respect to Dell up to the No-Shop Period Start Date. This Acquisition Proposal, which is detailed below, is being delivered, as contemplated by the February 5 Merger Agreement, by Icahn Enterprises LP, and Carl C. Icahn, prior to the No-Shop Period Start Date.
Icahn Enterprises LP
We believe that you will agree that Icahn Enterprises is well able to provide the $1 billion cash equity capital (in addition to its existing $1 billion stock position in Dell), and that Mr. Icahn and his affiliates other than Icahn Enterprises are well able to provide the additional $3 billion cash equity capital, contemplated in this Acquisition Proposal, which constitutes an aggregate $5 billion equity commitment. In this regard we invite you to examine the public filings of Icahn Enterprises and to meet with us regarding any additional questions you may have. Further, we have excellent relationship with numerous large banking institutions and we are confident that we would be able to obtain the debt financing contemplated in our proposal. Although we are well known for the performance of our investment activities, over time we have found that our greatest returns have come from the control and ownership of portfolio companies. For example, in May 2012, Icahn Enterprises purchased a controlling interest in CVR Energy, Inc. (‘‘CVR’’) for an aggregate purchase price approximately $2 billion. As of March 11, 2013, based on the closing sale price of CVR stock and distributions since Icahn Enterprises acquired control, we had a gain of over $2 billion on our purchase of CVR.
Currently, the portfolio companies owned or controlled by Icahn Enterprises and Mr. Icahn include among others, the following:

Name
Holdings
Date of Initial Investment
CVR Energy, Inc. 82% 2011
Tropicana Entertainment Inc. 67% 2008
West Point Home 100% 2004
Federal Mogul Corporation 78% 2001
Viskase Companies Inc. 70% 2001
XO Holdings 100% 2001
PSC Metals 100% 1998
American Railcar Industries Inc. 55% 1994
ACF Industries 100% 1984

The Acquisition Proposal For Dell
As you know, on March 10, 2013 Icahn Enterprises entered into a confidentiality agreement with Dell and commenced due diligence in support of an Acquisition Proposal. On March 13, 2013, Jefferies LLC (“Jefferies”), as a representative of Icahn Enterprises, entered into a confidentiality agreement with Dell and commenced due diligence in support of an Acquisition Proposal. Further, on and after February 8, 2013, Southeastern Asset Management Inc. (“Southeastern”) has publicly disclosed its desire to remain a shareholder of Dell, rather than participate in the merger contemplated by the February 5 Merger Agreement and has suggested that the merger be recast as a transaction under which Dell shareholders are provided with the opportunity to elect to continue to hold Dell shares or receive cash, at their option. T. Rowe Price has similarly opposed the February 5 Merger Agreement. For purposes of this proposal, Icahn Enterprises assumes that Southeastern and T. Rowe Price and other larger holders would, if provided the opportunity, support the proposal set forth below and agree to the matters set forth in the fourth bullet item of the proposal set forth below.
We hereby propose that we and Dell engage in the following merger transaction (the “Proposed Merger”, and the surviving company of the Proposed Merger, the “Surviving Company”):
Dell will obtain transaction funding composed of the following:
$2.0 billion investment ($1 billion by Icahn Enterprises and $1 billion by Carl C. Icahn and his affiliates other than Icahn Enterprises) for the purchase of common shares of the Surviving Company (in addition to the shares currently owned by Icahn Enterprises and its affiliates) at a price of $15 per share, resulting in an additional 133 million shares being issued by the Surviving Company. As contemplated in the fifth bullet item below, Mr. Icahn and his affiliates other than Icahn Enterprises, are willing to commit an additional $2 billion of cash equity financing, for an aggregate $5 billion total equity commitment to this Acquisition Proposal.
$7.4 billion of cash currently available at Dell.
$1.712 billion in new factoring receivable facility (total factoring receivable facility of $3.0 billion).
$5.218 billion in new debt.
We understand that this Proposed Merger contemplates less total leverage on the Surviving Company than under the February 5 Merger Agreement.
In connection with the Proposed Merger, Dell shareholders will be entitled to elect to receive either: (x) shares of the Surviving Company on a one-to-one basis with their current holdings; or (y) an aggregate of up to $15.65 billion in cash (the “Payment Funding”) payable at a rate of $15 per share. If the Payment Funding is fully utilized this would result in 1.043 billion shares (58.1% of the current outstanding) being subject to the Proposed Merger. If shareholders electing to receive cash exceed the maximum number of shares that may be acquired with the Payment Funding, then such elections will be accepted on a pro rated basis. If electing shareholders are insufficient to utilize all of the Payment Funding, then the balance will be distributed to all of the remaining shareholders of the Surviving Company as a special dividend (the “Special Dividend”).
In addition to the Payment Funding, Icahn Enterprises anticipates that Dell would be required to pay the breakup fee under the February 5 Merger Agreement of $180 million, and that Dell would incur other deal fees and expenses in the Proposed Merger of approximately $500 million, for a maximum aggregate use of funds of approximately $16.33 billion.
Neither Icahn Enterprises (which together with its affiliates, currently owns approximately 80 million shares of Dell), Southeastern (which publicly reports ownership of approximately 146.5 million shares of Dell), T. Rowe Price (which publicly reports ownership of approximately 82 million shares of Dell), nor other large holders that so agree (collectively with Icahn Enterprise, Southeastern, and T. Rowe Price, the “Rollover Holders”), would be eligible to elect to receive cash or shares in the Proposed Merger, but rather their existing common stock position in Dell would rollover into the Surviving Company. Rollover Holders would receive the Special Dividend, if any.
Pursuant to the Proposed Merger, if all eligible existing Dell shareholders elect to receive cash, then approximately 58.1% of the currently outstanding Dell shares would be subject to the Proposed Merger and following the completion of the Proposed Merger, Icahn Enterprises and its affiliates would own 24.1% of the outstanding shares of the Surviving Company; Southeastern and its affiliates would own 16.6% of the outstanding shares of the Surviving Company; T. Rowe Price and its affiliates would own 9.3% of the Surviving Company and the remaining public shareholders would own 50% of the shares of the Surviving Company. The opportunity exists to increase the number of shares cashed out by non-Rollover Holders in the Proposed Merger, if the large holders agree with Icahn Enterprises to become Rollover Holders. Further, Mr. Icahn and his affiliates other than Icahn Enterprises would be willing to commit (in addition to the equity investment provided for in the first bullet item above) an additional $2 billion of equity capital in cash, in the event that Southeastern, T. Rowe Price or other existing large Dell shareholders do not agree to become Rollover Holders.
Closing is anticipated to occur in July 2013.
This proposal contemplates the negotiation, execution and delivery of a definitive agreement (the “Definitive Agreement”) containing the terms and conditions set forth herein, together with covenants, representations, warranties and indemnification provisions which are satisfactory to both parties (including, if so requested, limits on the election of merger consideration) and which are typical and standard in a transaction of this nature.
This letter is a non-binding proposal. Neither Icahn Enterprises, Mr. Icahn, their respective affiliates, officers or directors or representatives, have, nor will this proposal letter or any discussions or communications among the parties, create or constitute, any offer, obligation, contract, commitment or duty of any kind or character, to engage in, negotiate or enter into or complete a transaction. Only a Definitive Agreement executed and delivered by the parties thereto, shall be binding upon the parties.
We look forward to proceeding with negotiations as promptly as possible and are prepared, together with Jefferies, to commit the resources to develop a Definitive Agreement with you. In addition, we look forward to receiving your confirmation that the Special Committee has concluded that our proposal is or could reasonably be expected to result in, a Superior Proposal.
Very truly yours,
/S/
Carl C. Icahn

Icahn Enterprises LP
By: Icahn Enterprises GP Inc., its general partner
By: Carl C. Icahn, Chairman of the Board
Forward-looking Statements
Any statements in these materials about prospective performance and plans for the Company, the expected timing of the completion of the proposed merger and the ability to complete the proposed merger, and other statements containing the words “estimates,” “believes,” “anticipates,” “plans,” “expects,” “will,” and similar expressions, other than historical facts, constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Factors or risks that could cause our actual results to differ materially from the results we anticipate include, but are not limited to: (1) the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement; (2) the inability to complete the proposed merger due to the failure to obtain stockholder approval for the proposed merger or the failure to satisfy other conditions to completion of the proposed merger, including that a governmental entity may prohibit, delay or refuse to grant approval for the consummation of the transaction; (3) the failure to obtain the necessary financing arrangements set forth in the debt and equity commitment letters delivered pursuant to the merger agreement; (4) risks related to disruption of management’s attention from the Company’s ongoing business operations due to the transaction; and (5) the effect of the announcement of the proposed merger on the Company’s relationships with its customers, operating results and business generally.
Actual results may differ materially from those indicated by such forward-looking statements. In addition, the forward-looking statements included in the materials represent our views as of the date hereof. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date hereof. Additional factors that may cause results to differ materially from those described in the forward-looking statements are set forth in the Company’s Annual Report on Form 10–K for the fiscal year ended February 1, 2013, which was filed with the SEC on March 12, 2013, under the heading “Item 1A—Risk Factors,” and in subsequent reports on Forms 10–Q and 8–K filed with the SEC by the Company.
Additional Information and Where to Find It
In connection with the proposed merger transaction, the Company will file with the SEC and furnish to the Company’s stockholders a proxy statement and other relevant documents. Stockholders are urged to read the proxy statement when it becomes available and any other documents to be filed with the SEC in connection with the proposed merger or incorporated by reference in the proxy statement because they will contain important information about the proposed merger.
Investors will be able to obtain a free copy of documents filed with the SEC at the SEC’s website at http://www.sec.gov. In addition, investors may obtain a free copy of the Company’s filings with the SEC from the Company’s website at http://content.dell.com/us/en/corp/investor-financial-reporting.aspx or by directing a request to: Dell Inc. One Dell Way, Round Rock, Texas 78682, Attn: Investor Relations, (512) 728-7800, investor_relations@dell.com.
The Company and its directors, executive officers and certain other members of management and employees of the Company may be deemed “participants” in the solicitation of proxies from stockholders of the Company in favor of the proposed merger. Information regarding the persons who may, under the rules of the SEC, be considered participants in the solicitation of the stockholders of the Company in connection with the proposed merger, and their direct or indirect interests, by security holdings or otherwise, which may be different from those of the Company’s stockholders generally, will be set forth in the proxy statement and the other relevant documents to be filed with the SEC. You can find information about the Company’s executive officers and directors in its Annual Report on Form 10-K for the fiscal year ended February 1, 2013 and in its definitive proxy statement filed with the SEC on Schedule 14A on May 24, 2012.

Blackstone Group and activist investor Carl Icahn expressed interest in the computer maker before a key deadline for offers expired Friday, with each notifying a special committee of Dell’s board that they are working on firm bids for the Round Rock, Texas, company, people familiar with the matter have said.

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Private equity firm Blackstone Group has made a bid for the computer company, according a report from Bloomberg News that cited unnamed sources.

Dell’s go-shop period, under which a special committee of its board of directors is seeking superior offers to the $24.2 billion Michael Dell/Silver Lake buyout offer announced last month, technically expires today, so if an offer has been submitted, it is coming in at the last second. No offers had been confirmed as of the close of business Friday.

Dell will announce the results of the go-shop period on Monday, at which time we’ll get a look at Blackstone’s terms. Also ahead in the Dell-buyout process is a deeply detailed proxy filing that will lay out the reasoning behind the original buyout offer as well as explain the valuation.

Update: Activist investor Carl Icahn is also getting in on the action. The Wall Street Journal reports that Icahn is working on a bid. Notifying Dell’s special committee that bids are coming should extend the go-shop period by four days, the Journal reported, citing sources familiar with the situation.

Icahn stepped into the Dell buyout frenzy on March 6, announcing that he had taken a 6 percent stake in Dell and that he opposed the Dell-Silver Lake offer, and arguing that a better way to use Dell’s cash would be to pay a special dividend amounting to $9 a share. He also threatened Dell with “years of litigation” if the board refused his offer.

Mr. Dell needs to persuade Dell Inc. investors that the prospects for the company he founded in his dorm room in 1984 and has been running for the past six years are anything but rosy if he is to succeed with his plan to take the computer maker private.

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Icahn stepped into the fray last week, announcing that he had acquired a stake amounting to about 6 percent of Dell shares.

Dell shares rose by 1 percent in premarket trading to $14.30 a share as of a few minutes before 9 am ET.

In a letter to Dell’s board, which was made public in a filing with the U.S. Securities and Exchange Commission, Icahn had argued that the company’s plan to sell itself to founder and CEO Michael Dell and private equity firm Silver Lake Management at $13.65 a share “significantly undervalues” the company.

Icahn proposed instead that Dell pay shareholders a special dividend of $9 per share that would be paid for by a combination of cash on hand and additional debt. The letter came as Evercore Partners, a Dell adviser, has been running a “go shop” process, under which it is seeking alternative offers. Dell’s rivals Hewlett-Packard and Lenovo have both taken advantage of that process in order to get a look at Dell’s books.