Dell delays buyout vote, signaling lack of support

By DAVID KOENIG

and MICHAEL LIEDTKE

Associated Press

ROUND ROCK, Texas — Michael Dell believes he can revive the company bearing his name if his group of investors can buy it for $24.4 billion. But that deal is in danger of falling apart, increasing the chances that the personal computer giant’s founder might not be CEO much longer.

The formidable challenges already facing Dell Inc. and its CEO got more daunting Thursday with the slumping company’s decision to delay a vote on Michael Dell’s proposed buyout.

The postponement until next Wednesday signals that a five-month campaign by Michael Dell and the company’s board hasn’t overcome the staunch resistance of billionaire Carl Icahn and other shareholders, who argue that the buyout price is too low and discounts the company’s long-term prospects.

Michael Dell’s offer has the support of three shareholder-advisory firms and is backed by the financial clout of buyout specialist Silver Lake Partners and a group of lenders. It would take the company private so that Michael Dell can try to engineer a long-term recovery without the glare of Wall Street and its fixation with quarter-to-quarter expectations.

The offer works out to $13.65 per share, or more than 40 percent below where the stock stood in early 2007.

That was when Michael Dell returned for a second stint as the company’s CEO — just a few months before Apple Inc. started selling the iPhone, which triggered a mobile-computing revolution that left Dell Inc. on shaky ground.

Rather than relying on the types of desktops and laptops made by Dell, more people are embracing convenient and powerful smartphones and tablet computers to connect to the Internet and handle other common computing tasks. In a telltale sign of the upheaval, tablets are expected to outsell laptops for the first time this year.

Michael Dell plans to invest heavily in tablets and a new breed of hybrid PCs that offer the touch-screen controls of mobile devices. That commitment is likely to depress the company’s earnings until the additional spending pays off. At the same time, he wants Dell to become a diversified seller of technology services, business software and high-end computers — much the way IBM Corp. successfully transformed itself in the 1990s.

Unlike IBM, Michael Dell believes the radical makeover can be better done by a company that isn’t facing Wall Street’s pressures to increase profits and revenue from one quarter to the next. That’s why he structured his buyout to end Dell’s 25-year history as a publicly held company — a run that has made the 48-year-old CEO one of the world’s richest people, with an estimated fortune of $15 billion, according to Forbes’ latest rankings.

Michael Dell and a four-person board committee overseeing the company’s sale negotiations will make last-ditch efforts during the next six days to persuade opposing shareholders to change their minds while also prodding apathetic shareholders who didn’t cast their ballots to weigh in with a yes vote.

The proposal needs the backing of just over 42 percent of Dell’s outstanding stock to be approved. Less than 50 percent of the stock is needed because Michael Dell’s 15.6 percent stake in the company isn’t counted in the balloting.

Shareholders representing at least 20 percent of the votes are known to be in opposition.

It’s possible that Michael Dell and Silver Lake could sweeten their offer to sway the holdouts, although many analysts are skeptical that the bid will be increased because the PC market and Dell’s financial performance have deteriorated even further since the deal was reached in February. The board says it already wrangled six bid increases from Silver Lake and Michael Dell during the negotiations leading up to the agreement at $13.65 per share.

Michael Dell isn’t sharing his thoughts publicly. He showed up at Thursday’s meeting at the company’s Round Rock, Texas, headquarters with several other board members. But he made no remarks and walked out without answering questions after the gathering was quickly adjourned to give him and the board more time to find a way to get the deal done.

The hope for a better offer, or at least getting a deal done, seemed to help Dell’s stock Thursday. After the delay was announced, the stock gained 24 cents, or 1.9 percent, to close at $13.12.

If Michael Dell’s deal collapses, it would thrust the company and its stock into turmoil, said Needham & Co. analyst Richard Kugele.

“We fear that Dell is entering a period of massive uncertainty, where nearly all options are negative, disruptive and MESSY,” Kugele warned Thursday in a research note.

The immediate worry would be a possible overthrow of Dell’s entire board, one that would also lead to Michael Dell’s ouster.

Icahn, Dell’s second largest shareholder behind Michael Dell, is teaming up with Southeastern Asset Management, another major shareholder, in an attempt to replace Dell’s 10-member board with an alternative slate. That slate would back a complicated proposal to distribute nearly $16 billion in cash to stockholders while still leaving them with a stake in the company.

In a joint statement, Icahn and Southeastern Asset said Thursday’s delaying tactic “reflects the unhappiness of Dell stockholders” with Michael Dell’s plan.

Dell hasn’t scheduled the date of its annual meeting, but Icahn contends the law requires one by Aug. 14. Last year, the company held its annual meeting on July 13. Dell spokesman David Frink declined to say whether the meeting will be held by Aug. 14 this year.

If his mutiny succeeds, Icahn has already pledged to dump Michael Dell as CEO. He hasn’t identified whom he has in mind to run the company.

Even if the Icahn-led rebellion is thwarted, Kugele questions whether Michael Dell will want to remain CEO of a publicly held company that is trying to make wrenching changes to adapt to a shift in the way people are engaging with technology.

Worldwide sales of laptop and desktop machines have fallen from the previous year in five consecutive quarters, the longest slide in industry’s history, according to research firm Gartner. Dell, the world’s third largest PC maker, saw its shipments slip by another 4 percent during the April-June period, despite aggressive price cuts to spur more sales.

Michael Dell has proposed contributing $750 million and about $3.7 billion worth of stock toward the buyout. The rest of the $24.4 billion would come from Silver Lake and lenders, including a $2 billion loan from longtime Dell partner Microsoft Corp.

To get a deal done at that price, Michael Dell and the company’s board will have to sway shareholders such as Joe Whitlock, who attended Thursday’s brief meeting. Whitlock, a longtime shareholder who said his stake “isn’t enough to make a difference” in the outcome, didn’t vote Thursday. Although his stockbroker had advised him to support the buyout, he began to have second thoughts and said the $13.65 per share being offered “is undervalued for the stock.”

Icahn, Southeastern and other shareholders have reached similar conclusions, arguing that Dell Inc. has already made inroads in business software and other promising technology niches that are likely to drive the stock price higher within the next few years. They contend the deal currently on the table would unfairly allow Michael Dell and his backers to reap all the gains after buying the company at what will eventually look like a bargain price.

The alternative drawn up by Icahn and Southeastern proposes buying up to 1.1 billion of Dell’s nearly 1.8 billion shares for $14 apiece. That would ensure existing shareholders would also still own stock, if they choose, so they could benefit from a turnaround. The bid would also distribute warrants giving shareholders access to some additional stock in the future. Icahn and Southeastern estimate their plan is worth $15.50 to $18 per share. Combined, Icahn and Southeastern own a nearly 13 percent stake in Dell.

Dell’s board contends that shareholders are better off taking cash now and transferring all the risks of an uncertain turnaround to Michael Dell and his backers.

It’s a gamble that others have been unwilling to take. Dell’s board says it approached dozens of potential buyers about making a bid for the company and couldn’t find any takers.

After reaching the deal with Michael Dell and Silver Lake, Dell received an offer from another buyout group, the Blackstone Group. But that bid was withdrawn in April after Blackstone reviewed Dell’s books and was scared off by the company’s “rapidly eroding financial profile.”

It has been a harsh comedown for one of corporate America’s greatest success stories.

While still a teenager, Michael Dell started PC’s Limited, now known as Dell, from his dorm room at the University of Texas in Austin in 1984. He initially sold computer disk drives, but soon was assembling computers and undercutting conventional retailers on price. He raised $30 million by taking the company public in 1988. Dell went on to change the PC business with low costs, customized orders and direct sales — first over the phone and later the Internet.

Dell’s stock hit a split-adjusted peak of $60 during the dot-com boom in 2000 when the company was still riding high amid booming sales of PCs. Many analysts believe the stock could plunge below $9 and test its lows reached last fall if there isn’t a deal in place to sell the company.