Dell’s board special committee has neatly painted investors into a corner. In a new presentation, the group evaluating offers for the company has shown persuasively why shareholders should back the $24.4 billion buyout by Silver Lake Partners and Michael S. Dell, and why Carl C. Icahn’s rival bid fell short. But harping on how badly the company is doing creates a difficult bind if investors go the other way and vote the deal down.
Silver Lake and Dell’s founder originally appeared to be grabbing a bargain, even though the offer made public in February came at a chunky premium to where the company’s shares had been trading. But Dell’s miserable financial performance since then makes it look as though shareholders are actually getting a generous price. Analysts’ estimates for Dell’s 2014 earnings have fallen by 40 percent since the deal was announced. And the company has been slow to grasp the situation, with revenue falling short of the board’s plan in seven of the last nine quarters.
A cynical observer might wonder whether the board, having agreed terms with Silver Lake, is eager to show the price in a favorable light by making the company look bad. But it’s harder to shade broader market statistics, and the entire PC business is in meltdown. Researcher IDC’s estimates for global sales in 2016 have dropped 40 percent since a year ago. On top of that, Dell is losing market share.
This gloom helps the special committee undermine the leveraged recapitalization plan put forth by Icahn and Southeastern Asset Management, which would leave Dell publicly traded but with a heavier debt burden, having paid out a big dividend. The offer depends on $5.2 billion of financing, as yet not committed. And the committee says Dell has near-term cash needs that would leave it $3.9 billion short of the proposed $17.3 billion special dividend.
Dell’s shares were trading below $11 a share before the possibility of a buyout leaked to the media. The board’s persuasive argument that Dell’s business has since deteriorated significantly raises the risk its shares would fall much lower than that if the Silver Lake-Michael Dell buyout at $13.65 a share fails. After all, a board that effectively says “we really are that bad†runs the risk of everyone believing it.
Robert Cyran is a columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
