Dell founder ups takeover bid based on voting rule change

Wed Jul 24, 2013 4:08pm EDT

Dell founder and CEO Michael Dell delivers his keynote address at Oracle Open World in San Francisco, California September 22, 2010. REUTERS/Robert Galbraith

Dell founder and CEO Michael Dell delivers his keynote address at Oracle Open World in San Francisco, California September 22, 2010.

Credit: Reuters/Robert Galbraith

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(Reuters) - Dell Inc founder Michael Dell raised his $24.4 billion bid by less than 1 percent just hours before it was to be put to a vote, tacking on a controversial demand to change voting rules to make it easier for him to buy and take the No. 3 personal computer maker private.

A special board committee on Wednesday was reviewing the CEO's sweetened $13.75 offer and requirement that a majority of votes cast be enough to seal the deal, an easier threshold for him to meet.

But the committee wants at least $14 per share to even consider that change in voting terms, a person familiar with the matter said. And Silver Lake, which is backing Michael Dell's now roughly $24.6 billion bid, will not back an increase to $14, said a second person familiar with the matter.

The vote on the buyout was postponed for a second time, to next Friday, to give investors yet another week to consider. The first vote had been slated for July 18.

Michael Dell's unusual demand sparked outrage among major investors and is likely to incite aggressive legal challenges, law experts say. His offer now requires a majority of all shareholders' votes, a difficult bar to meet because about a quarter of shares have not been voted either way, which then count as votes against him.

Activist investor Carl Icahn, who has amassed an 8.7 percent stake in Dell and is leading a charge with Southeastern against the buyout with an offer of his own, tweeted on Wednesday that "all would be swell at Dell if Michael and the board bid farewell."

"The latest change is a "transparent attempt to force their freeze-out transaction across the finish line despite the vote of its stockholders," Icahn said in a subsequent statement.

The sweetened offer, which Michael Dell and Silver Lake called their best and final proposal, comes after the group refused for months to consider a raised bid despite growing opposition from Icahn and other shareholders.

Richard Pzena, founder and co-chief investment officer of Pzena Investment Management, which owned 0.73 percent of Dell's outstanding shares at the end of March, called the proposed change in shareholder voting rule "outrageous".

"Certainly the 10 cents wouldn't sway anybody so they have to change the rules, and if the special committee goes along with this, it would be a travesty," Pzena said.

A THORNY ISSUE

Experts say the CEO's attempt to change the voting rules is legal but almost certain to get challenged in court, where there's been little precedent.

While trying to change voting provisions with a raised bid is uncommon, similar tactics have been employed by other companies in the past when investor support was lacking.

OSI Restaurant Partners Inc., owner of the Outback Steakhouse chain, was bought by Bain Capital Partners and few of the OSI management in 2007 after the group bumped up their offer price and changed the voting requirements. That case, which is not directly comparable because it involved excluding the founder's and management's shares from the vote, was challenged in Florida and Delaware courts and dismissed.

But Brian Quinn, a professor at Boston College Law School who runs the M&A Law Prof Blog, said that Michael Dell and Silver Lake may face a higher burden of proof in court.

"When the lawsuits, of which there are many, proceed the board won't get the protection of business judgment but will have to prove fairness," he said.

Fairness puts the burden on the board to prove the price and process were fair. Business judgment is much more management friendly and puts the burden on plaintiffs to prove there were conflicts of interest or lack of good faith.

"That's a big wrinkle," he said.

Dell shares closed up nearly 3 percent at $12.91 on Wednesday.

"According to our latest tally, approximately 27 percent of the unaffiliated shares have not yet been voted. The presumption that these shares should be treated as if they had voted against the transaction is patently unfair," Michael Dell and Silver Lake said.

The votes that have come in so far are split evenly between yes and no, according to people familiar with the matter. That means those who abstain from voting can determine the outcome.

The buyout group believes it can get the votes to pass the deal if Dell will count just the shares that have been voted. The provision of counting non-votes as a "no" was accepted reluctantly by the bidders as it sets a very high threshold to meet, according to one of the sources.

Another investor said the new offer is not really a bump.

"This is not about how to win the deal, this is about how Michael Dell exits the process," said the Dell investor, who requested anonymity. "They're really putting the screws on the special committee but I don't see how the special committee can accept the conditions."

(Additional reporting by Jessica Toonkel, Supantha Mukherjee, Nadia Damouni and Tom Hals; Editing by Rodney Joyce, Sofina Mirza-Reid and Leslie Gevirtz)

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Comments (5)
SeniorMoment wrote:
I thought Michael Dell was smart until her tried to buy his own company which as sales decline will no doubt be worth less and less. Even so, I doubt a dime a share will change anyone’s mind about selling.

Jul 24, 2013 9:53am EDT  --  Report as abuse
SeniorMoment wrote:
I used to buy all my computers from Gateway, which I also ordered at work, but that all changed when Gateway started going down Dell’s path of using proprietary components that have replacement parts you can only get from the manufacture, who might even discontinue them at any time and recycle the parts instead of placing them with a third party specialty reseller. The mainframe computer companies that delved into making PC’s were even worse than dell as far as going deeply proprietary without good reason. Remember how the Microchannel Bus from IBM left behind the PC compatible standard minus IBM made PC’s. Consumers if given a choice want standards for parts that fit the entire industry and facilitate price competition as well as constant upgradeable components.

I made a mistake in buying a used Dell laptop from a son. The internal DVD drive failed and instead of being able to buy and off the shelf one from a local computer parts super store for $50 or less for a combo RW drive, it is only available from Dell for about $160, which is more than the laptop is even worth today, so as a practical matter I bought a USB combo generic DVD RW drive for even less mail order which defeats having everything in the laptop. I would have preferred to buy an internal Blue Ray RW which also can do DVD’s, but the shape required by Dell is not available and neither is an upgraded component from Dell.

My wife and I are retired and do not have a business need for the latest and greatest to replace the tried and true.

I now simply build and rebuild my own PC as needed. It is harder to do with laptop computers, but not impossible. And, once I get old enough having both a slow and a faster computer in the home won’t even bother me, since the oldest will be fast enough for my aged response time.

Jul 24, 2013 10:13am EDT  --  Report as abuse
jefferysikes wrote:
For several years now the PC market has been in steep decline, in part due to the recession and part due to the changes in hardware which have not been vast enough for change and the largest contributor being the latest Microsoft operating systems, which have been wholly rejected by the public. The Frankenstein called Windows 8 is probably the single worst operating system ever to be released to the public.

Finally the reliability of Dell systems is not what it was when their systems were manufactured in the United States. Now a Dell is no different than another Chinese made IBM clone system which is usually ½ the price.

People simply don’t spend as much time computing as they once did. Initially it was a novelty and now it’s become somewhat of a necessity in order to be able to communicate, however there remain millions of users who are still hanging on to the old Windows XP platform and early Intel P4 processors which fulfill their needs at the moment. That said Mr. Dell best take the deal and get out while the getting is good.

The PC clone manufacturer who will win in this current game is the one who understands the value of proprietary software/hardware and the availability of their hardware to boot and run multiple platforms such as Windows and Unix variations (As Apple has done for decades). So far it appears as the PC manufactures are clinging religiously to the failing Microsoft who continues to produce products the public does not like or want…. There is your hint Mr Dell.

Jul 24, 2013 10:58am EDT  --  Report as abuse
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