Michael S. Dell and the investment firm Silver Lake are currently standing firm by not raising their $24.4 billion offer for Dell Inc.
While they strongly believe that their bid of $13.65 a share is full and fair, the two appear to be staring down Institutional Shareholder Services, the biggest proxy advisory firm.
I.S.S., as the advisory firm is known, will likely publish its recommendation on the management buyout within the next week. Advisers to both the buyers and to a special committee of Dell’s board currently assume that the report will likely be unfavorable toward the deal, potentially dealing a huge blow to its chances of success. That, however, could serve the interests of Mr. Dell and Silver Lake.
The two parties believe that Dell’s stock will tumble if I.S.S. comes out in opposition to the deal, as investors fear that the transaction fails and flee the stock. A significant portion of the shareholder base â€" by some counts, more than 15 percent â€" is currently held by arbitrageurs who are betting on the success of the leveraged buyout and are inclined to bail out if signs emerge that the takeover is on the rocks.
There already appears to be a hint of that phenomenon: the company’s shares fell as much as 4 percent on Friday after reports in The New York Post and Bloomberg News said that the buyers intended to stand firm on their current bid. As of midday, the stock was still down nearly 3 percent for the day, at $12.94.
That drop may serve to help the buyout offer. People close to both them and to the Dell special committee are betting that I.S.S. may still be swayed to support the deal if the company’s stock plummets in the wake of the transaction’s failure. the tumble in the price on Friday may help prove their point.
Meanwhile, the Dell special committee published a supplemental investor presentation on Friday that further painted a gloomy picture of the company’s future if the deal doesn’t succeed. The materials were produced to follow-up questions from I.S.S. about how a standalone Dell’s shares might trade if the deal fails.
In its presentation, the committee argues that an alternative proposal by the billionaire Carl C. Icahn and the asset management firm Southeastern Asset Management â€" a buyback of 1.1 billion shares at $14 each â€" values Dell at about 12 times earnings before interest, depreciation and amortization. That’s more than twice the 4.6 times Ebitda valuation at which Hewlett-Packard currently trades.
The committee also pointed to analyst price targets for Dell’s stock before word of the leveraged buyout emerged. Analysts generally estimated that the company would trade at about 7.2 times earnings for the 2014 fiscal year. At the current earnings estimates of $1.04 a share, that would mean that Dell is expected to trade at about $7.49 a share.
(Mr. Icahn has argued that the company is overstating its state of financial duress. One sum-of-the-parts estimate that he has put forward for Dell is about $22.34 a share.)
Of course, it remains to be seen whether I.S.S. will be moved by both Mr. Dell’s and Silver Lake’s hard stance and the special committee’s dire predictions. And it’s possible that Mr. Dell in particular may blink and push to raise the bid after all if the proxy adviser calls his group’s bluff. The special committee has already encouraged him to raise his offer to save the company.
For now, however, some investors aren’t planning to wait for the endgame.
