Icahn demands Dell pay $16 billion dividend to avert fight

Fri Mar 8, 2013 6:21am EST

A Dell computer logo is seen on a laptop at Best Buy in Phoenix, Arizona, February 18, 2010. REUTERS/Joshua Lott

A Dell computer logo is seen on a laptop at Best Buy in Phoenix, Arizona, February 18, 2010.

Credit: Reuters/Joshua Lott

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(Reuters) - Activist investor Carl Icahn is demanding Dell Inc pay out $15.7 billion in special dividends, joining a growing chorus of opposition to founder Michael Dell's plan to take the world's No. 3 personal computer maker private.

The billionaire investor, whose arrival on the scene typically puts companies on guard, wants the PC maker to pay $9 a share in dividends immediately from its own cash and from raising new debt.

Icahn, who has a reputation for demanding aggressive changes after amassing stakes in companies, argued in a letter to the company's board published on Thursday that Michael Dell's and Silver Lake's proposed $24.4 billion buyout short-changed shareholders, undervalued the company and benefited mainly the company co-founder himself.

"We see no reason that the future value of Dell should not accrue to ALL the existing Dell shareholders - not just Michael Dell," Icahn wrote in the letter, which Dell disclosed in a filing.

Icahn's proposed special dividend of $9 per share would include $4.26 a share derived from $5.25 billion in new debt.

He argued that, combined with a "stub" value of $13.81 per share that his firm calculated based on discounted cash flow, such a move would deliver shareholders a total value of $22.81 per share.

That would be a 67 percent premium to the $13.65 buyout price put forward by Michael Dell in partnership with private equity house Silver Lake and Microsoft Corp.

In his letter, Icahn asked Dell's board to commit to his proposal to "avoid a proxy fight." He also wants Dell to combine an upcoming special shareholder vote on the buyout deal with its regular annual general meeting, when Icahn said he intended to put forward a slate of his own directors for election to the board.

"If you fail to agree promptly to combine the vote ..., we anticipate years of litigation will follow challenging the transaction and the actions of the directors that participated in it," Icahn said in the letter.

To speed up the payment of a special dividend, Icahn himself pledged to provide a $3.25 billion bridge loan to Dell, if necessary.


Icahn joins other major investors opposed to the deal. Excluding the activist investor, who has not disclosed his stake, shareholders representing almost 18 percent of Dell shares, led by Southeastern Asset Management with a stake of more than 8 percent including options, say they will vote against the buyout.

The likelihood of alternative proposals prompting Dell to sweeten his offer has increased since a handful of major shareholders spoke out against the deal, analysts said.

"Recent events have raised the level of scrutiny on the situation, which could end up increasing the take-private price," Wells Fargo analyst Maynard Um wrote in a note.

Southeastern, run by activist investor Mason Hawkins, has said Dell could borrow money to make a major share repurchase or break up the company and sell units separately.

T. Rowe Price has also spoken out against the deal.

Icahn said only that his interests held a substantial stake in Dell. He did not disclose his exact shareholding.

CNBC, citing unnamed sources, reported on Wednesday that Icahn had accumulated about 6 percent of Dell's shares. [ID:nL1N0BY50H] That would make him the third-largest shareholder, after Southeastern and Michael Dell himself.

Dell shares finished 0.7 percent lower at $14.22 on the Nasdaq on Thursday. They had risen about 8 percent since trading closed on February 4, the day before Dell announced its plan to go private.


Jefferies & Co analyst Peter Misek said most investors were likely to favor an increased bid, but a rival offer was unlikely.

"Icahn would likely be satisfied with a raised bid to $15, which we think would be higher than the potential stock price realized from a leveraged recap," Misek wrote in a note.

"While a break-up of Dell would increase the probability of a strategic investor buying a portion of the business, we still see this as unlikely due to the size of the PC business and Michael Dell's desire to lead a shift toward enterprise hardware/software."

Dell said it would welcome Icahn's participation in a "go-shop" process to find alternative proposals, which the company announced on Wednesday.

In addition to Icahn's proffered personal bridge loan, his Icahn Enterprises LP would also provide $2 billion of bridge financing for the "prompt payment" of the dividend, if his slate of directors was elected, Icahn said in the letter.

"This is far from over," said Anthony Michael Sabino, a professor in the law department at St. John's University's Peter J. Tobin College of Business. "Expect a lot of pulling and tugging between multiple rivals here, with Dell as the prize."

(Editing by Supriya Kurane, Robin Paxton and Dan Grebler)

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Comments (2)
thoma wrote:
I have sold almost all my DELL positions but have held a small sliver for the potential upside created by Icahn. Icahn, Einhorn Ackman and similar have overnight become champions of the retail shareholder. Almost in every case, board and management are usually mostly occupied trying to figure out how to screw the shareholders. I have supported Michael; Dell since 1986, and i know he only sees me as a small retailer waiting and deserving to be screwed.
Next of course Icahn or several activist investors could zero in on APPLE and teach that board a lesson that shareholders “do matter, and are not baggage”. IN fact the baggage is the board of directors whose interests are aligned with management and fellow director and not AT ALL the shareholders that they have the duty to represent.
I add I have a personal ax to grind also. I am a valuation expert in my own industry and have reached the highest level of expertise and qualifications. My expertise is maximizing value. However, I will never be on a board of directors even though maximizing value should be the sworn duty of each board member. In fact value is future benefits mostly long term and not the short term that Wall Street is obsessed with, but personal not shareholder interest is the priority of most board of directors. The British get it, what the appropriate relationship between board and shareholders should be; and are creating laws to guide a more honest path. There are many Wall Street analysts who talk down shareholders rights and interests and actually object to dividends as a sign of weakness- They are likely biased and more likely to be on a public company board and have become self-serving in their observations. A visionary like Steve Jobs would likely not get on a board of a company like Apple but a political animal like Al Gore always will. Does he still lay claim to inventing the internet? Just look at the board bios one can almost guess who plays golf with who. It’s not about shareholders for sure. Sometimes it’s about political correct selection, minorities, political persuasion, but it’s hardly ever about shareholders. I hope shareholder activism catches on and we also take a leaf from the British advancement in rules of engagement; with directors for shareholders and not versus shareholders. While waiting for reform or an activist to maximize our voting power, we shareholders, at a minimum, should make sure that any director who does not have shareholder interest at heart gets replaced at the next meeting.

Mar 09, 2013 3:11pm EST  --  Report as abuse
Bunker555 wrote:
The Southeastern, T. Rowe Price, and Icahn block just doesn’t have the numbers to jettison the deal. In the end, Michael Dell will get what he wants.

Mar 09, 2013 11:05pm EST  --  Report as abuse
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