Dell Shareholders Approve Founder’s Buyout Proposal
Dell Inc. (DELL) Chief Executive Officer Michael Dell won shareholder approval for a planned $24.9 billion buyout, capping a seven-month standoff with investors and gaining free rein to attempt a turnaround of the struggling personal-computer maker outside the glare of public markets.
The founder’s victory, announced during a meeting today at Dell’s headquarters in Round Rock, Texas, ends the jousting between the buyout group and investors led by billionaire Carl Icahn and Southeastern Asset Management Inc. Disagreements over price pushed the deal to the brink of defeat and resulted in two increases since the proposal was announced in February. The takeover of the third-largest PC maker is the biggest LBO since Blackstone Group LP (BX) took Hilton Worldwide Inc. private in 2007.
CEO Dell, who founded the company as a college student in 1984, proposed taking it private to stem years of ebbing sales and profit as consumers shun PCs in favor of computing on smartphones and tablets. Along with partner Silver Lake Management LLC, he plans to boost investments in mobile devices and data-center machines without the need to satisfy profit-hungry public investors.
“There’s a lot of CEOs that have tried to take companies private to get away from the market,” said Michael Cusumano, a professor at the Massachusetts Institute of Technology’s Sloan School of Management. “It’s an uphill battle.”
Dell’s path mirrors the rise and fall of the PC industry. Along with peers including Compaq Computer Corp. and Hewlett-Packard Co. (HPQ), Dell rode a wave of growth as PCs became mainstream in the late 1980s and 1990s. The company also flourished by pioneering low-cost manufacturing and direct shipping to customers. Yet, like some competitors, it fell out of step with consumers over the last half a dozen years as people lost their appetite for desktops and laptops and gravitated instead to smartphones and tablets.
To prevail, the buyout by Dell and Silver Lake needed a majority of the voted shares to favor the transaction, excluding the CEO’s own stake of more than 15 percent. The deal won key endorsements in August from Institutional Shareholder Services Inc. and two other influential proxy advisory firms. It also had the backing of a special committee of Dell’s board that evaluated potential transactions on the company’s behalf.
Michael Dell and Silver Lake sweetened their bid in early August, to $13.88 a share, including dividend payouts, from their previous offer of $13.65. In return, they secured a concession from the special board committee on new voting terms that wouldn’t count abstentions as “no” votes. Michael Dell originally had agreed to that standard, yet later said it “does not make sense,” as the high number of shares that hadn’t been voted made it more difficult to secure approval.
The preliminary vote tally shows the deal was approved by holders of a majority of Dell’s shares, the company said in a statement today. The transaction is expected to be completed by the end of the third quarter of Dell’s 2014 fiscal year.
“In taking Dell private we plan to go back to our roots,” Michael Dell said on a conference call today after the vote. The company plans to do “what Dell does best,” simplifying technology trends like mobile and cloud computing for customers who are struggling to use them, the CEO said.
In Texas, Dell’s employees, shareholders and directors packed into a ballroom stocked with pastries and coffee to await the results. When director Alex Mandl revealed the outcome from the stage, a smattering of applause broke out and Dell stood near his front-row seat talking to colleagues.
Going private will give the company more flexibility to explore acquisitions and other investments, Chief Financial Officer Brian Gladden said in an interview after the vote.
“We can be a bit more aggressive,” Gladden said. “You can’t just kind of go crazy and spend however you want. You still have to be disciplined.”
Dell and Silver Lake’s victory was hardly assured just two months ago, when the shareholder vote was originally scheduled. They were facing steadfast opposition from institutional investors, who said the original deal price was too low. The buyout group postponed the ballot after deciding they didn’t have enough support in favor of the deal. The vote was delayed two more times amid behind-the-scenes negotiations that resulted in the sweetened bid and amended voting rules.
Success appeared more likely earlier this week, when financier Icahn abandoned his battle to derail the deal and put forward his own recapitalization plan.
Icahn wasn’t available to comment. Catherine Jones, an outside spokeswoman for Southeastern who works for ASC Advisors LLC, declined to comment on Dell. Peter Truell, a spokesman for Elliott Management Corp., another large Dell investor, also declined to comment, as did Matthew Halbower, CEO of Pentwater Capital Management LP.
Icahn holds an 8.9 percent stake, according to data compiled by Bloomberg, and Southeastern Asset Management owns about 4 percent. The two investors had made a series of alternative proposals to the bid from Michael Dell and Silver Lake, suggesting that the company repurchase most of the outstanding shares at $14 apiece and offer some warrants.
A judge in Delaware Chancery Court denied a request by Icahn to speed up a lawsuit aimed at stopping Dell from changing the procedures to vote on the deal and asking for a declaration that the board had breached its fiduciary duties.
Standard & Poor’s downgraded Dell’s corporate credit rating four levels to BB- from BBB yesterday, citing concern that the CEO’s buyout would create a more leveraged capital structure and diminished free operating cash flow, hampering the company’s ability to invest in new businesses and technologies.
Dell’s debt has fallen 2.6 percent this week, the most among peers, compared with a 0.09 percent gain in the Bank of America Merrill Lynch U.S. Technology & Electronics Index.
The company’s $400 million of 4.625 percent securities due April 2021 have declined 6 cents to 88 cents on the dollar this week to yield 6.68 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The company will have less than $20 billion of debt, Gladden said, and will spend less than $1.2 billion a year to service the debt from the buyout.
“This is not an overly leveraged transaction,” Gladden said on the conference call today. “We could have put more debt in this transaction -- we chose not to do that.” That choice will let Dell invest more in its operations, he said.
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