Reports that both the Blackstone Group and Carl C. Icahn have submitted preliminary bids for Dell now set off a highly choreographed dance of next steps. And the developments highlight the difficult choices that the Dell board now faces.
The two bids were submitted this weekend because of the terms of the acquisition agreement among Dell, Silver Lake and Michael Dell.
Under this agreement, the parties agreed to a “go-shop†period. In this case, the “go-shop†provides for a 45-day period during which the Dell board can freely solicit and speak to other bidders. This type of provision, though not required under the law, is common in private equity deals. It is put there to satisfy the Dell board’s fiduciary duties to obtain the highest price reasonably available in a sale. This is a legal obligation known as Revlon duties under Delaware law, the law that governs the Dell board’s decisions in this case as the company is incorporated in that state.
If Blackstone or Mr. Icahn had not lobbed in a proposal by the deadline, it would have become much harder for the Dell board to speak to them. In addition, the termination fee that Dell would have had to pay to the Silver Lake group if it accepts one of these proposals would have risen to $450 million from $180 million. No small change.
Now that the bids are in, the Silver Lake-Dell agreement also scripts how the Dell board must consider these two new proposals.
Under the agreement, the board can now only continue to talk to either Blackstone or Mr. Icahn if the directors conclude after consultation with outside counsel and its financial advisers that one offer, or both, could reasonably be expected to result in a superior proposal.
The term “superior proposal†is also defined in the acquisition agreement. And while it goes on for eight lines, the core part requires that to be a superior proposal the Blackstone or Icahn bids must be determined to be “more favorable to [Dell’s] stockholders than [the Silver Lake bid], taking into account all of the terms and conditions of such acquisition proposal (including the financing, likelihood and timing of consummation thereof)†as well as any counterproposal by the Silver Lake bidding group.
So, the next step is for the Dell board to consider these proposals under this standard and determine if they can lead to something better for Dell shareholders.
We don’t know the exact terms, but both the Icahn and Blackstone bids appear to have flaws. Mr. Icahn’s is a recapitalization that leaves 42 percent of the shares still outstanding. Blackstone’s is higher than Silver Lake’s but lacks committed financing. In fact in both cases, the bidders merely said they were highly confident of receiving necessary financing. As I have written before, “such a letter is a relic from the 1980s, when banks refused to commit to risky financing, Michael Milken and Drexel Burnham would step in to say that while a commitment was not forthcoming, the bank was highly confident it could raise the money.†In this case, this may be true, but also neither bidder probably wanted to pay the fees for more certain financing. But whatever the reason, without firm financing, neither bid will most likely be determined a superior proposal.
Despite these flaws, the Dell board is at least likely to say that the Blackstone bid has the potential to lead to a superior proposal, the only thing it needs to do at this juncture.
Mr. Icahn’s bid is more iffy, since presumably the board explored the possibility of a recapitalization before, and rejected it. Still I would be surprised if the board decided to exclude the investor, since it would come under heavy criticism. The contrary approach would at least keep him in the game as something to spur a higher bid from Silver Lake or Blackstone, which is most likely why Mr. Icahn is making the bid anyway. (Full disclosure - I never thought a competing bid would come in anyway, so my surprise in this deal is high.)
But even if the Dell board goes this far and determines that the proposals might lead to a superior offer, this does not mean it has to ultimately accept the new proposal. Instead, the bidders will not only have to submit a higher bid than the Silver Lake one, but include firm financing that the Dell board is confident can be consummated. In making this assessment, the bids right now are apples and oranges.
Again, with Mr. Icahn the board will have to assess the value of the stub and the upfront cash. Given the risks of a still-public Dell, it would be hard to see the board going with Mr. Icahn.
As for Blackstone, it really is still a proposal that appears half-baked, a placeholder to meet the go-shop deadline. Blackstone needs to put together a full bid, line up financing and get the Dell board to find the bid superior. Reportedly, the Blackstone bid, like the Icahn bid, also contemplates a public stub and the parameters of such a public minority would also have to be worked out.
But in either case, if Blackstone or Mr. Icahn gets to this final bid stage (and remember either may not make a final bid - what is happening right now is really a placeholder), this will not be an easy decision for the Dell board. It will not be simply considering who is the highest bidder for the entire company. Instead, it will probably have to weigh proposals that keep part of the company public, and this will mean weighing the value of a future Dell. This is not the easy determination of merely weighing cash bids - there you pick the highest. Instead, the board will have to assess the value of what may be a highly leveraged Dell without its current management and a declining business model. In this situation Silver Lake’s current bid may still be a superior one, despite the disapproval that such a determination would be met with by some of Dell’s shareholders.
Even if all of these hoops are jumped through and the Dell board finds a Blackstone or Icahn final bid to be superior, the Silver Lake group has matching rights under the agreement. If the Dell board determines that another proposal is superior, the Silver Lake group has a one-time period of four business days to match the proposal. During this time period the Dell board must negotiate with the group in good faith.
While this is only a one-time right, it still gives the Silver Lake group a way to guide the bidding. And given that neither the Blackstone nor Icahn bids are knock-out ones at this point, this will probably be no bidding like that in “Barbarians at the Gate,†where the dueling bidders ended up paying top dollar for RJR Nabisco. It still may be that the Silver Lake group raises its bid a few dollars a share just to lock up this contest.
But if they do not choose to raise their bid, one person who cannot do much to oppose any new deal is Michael S. Dell. Mr. Dell signed a voting agreement saying that if a superior proposal is accepted, he will vote his shares in proportion to other shareholders to support it. This does not mean that he has to work for the new bidder, but his ability to oppose a bid is limited.
All told, it means that Dell’s future is going to take quite a number of twists and turns in the next few months as the seriousness of these bids gets fleshed out. Expect more surprises.
