Friday, June 7, 2013

What If Dell is the Financial Equivalent of Sequester?

What If Dell is the Financial Equivalent of Sequester?

The buyout of Dell Computer by Michael Dell is slowly moving toward a conclusion, although the ending may not be pretty.  A proxy vote on Mr. Dell’s proposal is slated for July 18, 2013.  This date could be extended if the company doesn’t think it has the requisite votes.  Meanwhile Southeastern Asset Management and Carl Icahn continue to oppose Mr. Dell and are proposing a plan involving a large special dividend.

On several occasions, I’ve suggested that Mr. Dell’s proposal will eventually succeed after Mr. Dell sweetens the bid a little bit.  However, in the intervening months, Dell’s financial position has deteriorated, and I’m wondering whether Mr. Dell, his equity partners, or the lending banks will be willing to put more money into the deal.  Moreover, the SAM/Icahn proposal seems fairly unworkable.  According to company filings with the SEC, the counterproposal would leave Dell in a financially untenable position.  However, in order for Mr. Dell to succeed he must receive a majority of the shareholder votes, not including his 16% share.  This may be a tall order.
Final Days (2000)
I’m wondering if this saga is going to turn out like the Federal budget sequester: an outcome that everyone thought was so dire that they figured a compromise could be reached.  It now seems possible that Dell will wind up in a deadlock because Mr. Dell’s proposal can’t pass and the alternative proposal won’t fly.  With Dell’s business already deteriorating, deadlock will probably push shareholders to abandon the stock, sending it back into the single digits.  In addition, customers, vendors, and banks would also be unnerved.  The impasse no one wanted would become reality.

Originally Mr. Dell assumed he wouldn’t need his 16% share to achieve a majority for the buyout.  I doubt he expected Carl Icahn to surface and ally with Southeastern Asset Management.  Southeastern probably thought that some other private equity firm would enter the picture and make a higher bid.  After all, Southeastern believed Dell’s stock was somehow worth more than $20 per share.  Mr. Icahn bet that Dell or some other party might enter the fray and pay him a quick premium on his shares.  

Perhaps, Blackstone will turn out to have been the wisest party in this saga.  They got Dell’s special board to pick up their due diligence costs and then withdrew from the acquisition process after taking a close look at the books.  The remaining parties may wind up wondering how they got into this bind.  Financial sequester, like budget sequester, doesn’t end well.

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