What Dell Thought of Alternatives to the Silver Lake Proposal

Dell Inc. directors have repeatedly stressed that they considered all potential ways to improve value for shareholders before accepting a $24.4 billion takeover bid by Michael S. Dell and Silver Lake.

The company’s voluminous proxy statement, filed on Friday, shows their concerns about other alternatives, including a big stock buyback and selling off parts of the business.

Buried in one of the filing’s exhibits is a presentation that JPMorgan Chase bankers delivered to a special committee of Dell’s board on Jan. 18. In it, the bankers listed potential problems with some of the alternatives to a full take-private bid by Silver Lake or another private equity firm.

Some of Dell’s shareholders, including Southeastern Asset Management and the billionaire Carl C. Icahn, have called on the company to turn away from the $13.65-a-share bid by Mr. Dell and Silver Lake. Southeastern has loudly demanded that existing shareholders be given the chance to stay on as investors, through what’s known as a stub. And Mr. Icahn has suggested the possibility of paying out a special dividend to investors.

The two new bids that arose out of a 45-day “go-shop” process, from both Mr. Icahn and the Blackstone Group, contemplate leaving some of Dell publicly traded. Both are essentially variations on a stub, since some of the computer maker will remain publicly traded.

Of the two most commonly mentioned possibilities â€" borrowing money to either buy back lots of stock or to pay out a special dividend â€" JPMorgan said that the moves would seriously limit Dell’s financial flexibility.

Both would severely limit the company’s cash flow, according to the bankers. And the latter would both push Dell’s dividend to levels beyond what its rivals pay and signal that the computer maker has no further places to invest.

The presentation also ran through the benefits and drawbacks of other possibilities, including a sale to a strategic buyer (“strategic buyer for the entire business is unlikely”) and a sale of Dell’s core PC manufacturing arm (“loss of scale and intersegment synergies” and “potentially diminished free cash flow and debt capacity”).

Given those arguments, one wonders what Dell directors will ultimately consider when deliberating the bids by Blackstone and Mr. Icahn.