Monday, May 13, 2013

Carl Icahn Makes a New Proposal to Dell: Great or Desperate Move?


Carl Icahn Makes a New Proposal to Dell: Great or Desperate Move?

Carl Icahn should never be underestimated.  He has had an uncanny ability to extract value (critics would probably describe it as some form of blackmail) after taking large positions in companies.  Mr. Icahn and Southeastern Asset Management have made a new proposal to Dell that would pay investors a large dividend of $12 per share, but leave a portion of the company public.  The Special Committee of the Dell Board is now asking for details, because it isn’t clear what the proposal is worth or how it would be financed.
 
Brazilian Hedge Fund (2000)
The critics of Michael Dell’s buyout offer continue to insist that he is seeking to “steal” the company with his cash offer of $13.65.  Nonetheless, Dell’s stock is trading at $13.45, indicating that most investors think Mr. Dell’s proposal is about as good as it is going to get.  This isn’t surprising after Blackstone’s withdrawal from the bidding and the extensive data release that accompanied Dell’s proxy statement.

So what’s Mr. Icahn’s game?  I think he’s hoping to create a credible enough proposal, so that the special committee can pressure Mr. Dell to sweeten the offer a little bit.  The problem is that Dell’s immediate prospects are cloudy, at best, as Blackstone discovered when they rummaged through the books.  Moreover, a $1 per share increase in Mr. Dell’s bid translates into $1.75 billion that has to either come from more equity or bank debt.   My sense is that Mr. Dell is already fully committed, and Silver Lake will be reluctant to put more capital into the deal.  If the banks learned anything from the credit crisis, they won’t be willing to lend much more to this transaction.  Thus I am speculating that Mr. Icahn is playing out his last couple of moves, rather than engaging in some sophisticated strategy that will drive a substantially higher value for Dell.

While some of the largest investors such as Southeastern and T. Rowe Price remain disgruntled owners of the stock, I suspect that a great deal of stock is now in the hands of hedge funds and other short-term investors.   These folks probably don’t care about the long-term prospects of Dell and they don’t want Mr. Icahn to tie up Dell for the next several quarters in negotiation or litigation.  Instead, they’ll start pressuring the board to make Mr. Dell’s deal happen because they want to get their money out of the company as soon as possible.  If at some point Mr. Dell’s offer starts to fall apart, Dell’s stock will probably trade back in the single digits, and those hedge funds will take a bath.

As I’ve said from the beginning of this saga, I think Mr. Dell will sweeten the offer a tiny bit.  However, he’s not going to show his hand until the very last moment because he knows that he doesn’t have the flexibility to increase his offer more than once.  So I’m guessing that Mr. Icahn and Southeastern will ultimately accept the deal, despite their passionate rhetoric.  Then again, Carl Icahn has made billions of dollars driving hard bargains in difficult situations, and I’m just some guy sitting on the sidelines watching this saga.

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