Dell’s Deliberations about Alternatives to the Silver Lake Proposal

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Before accepting the $24.4 billion takeover bid by Michael Dell and investment firm, Silver Lake, directors considered alternative bids to improve shareholder value.  On Friday, the company filed a comprehensive proxy statement.  This statement reflects concerns the company had about previous alternative options which included big stock buybacks and selling off parts of the company. 

A presentation given by JP Morgan Chase bankers to a special committee of Dell’s board on January 18, 2013 was located in one of the filing’s exhibits.  The bankers highlighted potential problems with some of the previous alternatives to the Dell and Silver Lake deal. 

However, Dell shareholders, especially Southeastern Asset Management and billionaire Carl Icahn, have requested that the company reject the $13.65 per share deal offered by Dell and Silver Lake.  Southeastern has strongly requested that the company allow shareholders to use stub equity to stay on as investors.  Icahn suggests the possibility of paying investors with special dividends. 

In the two new bids that came during the 45-day go-shop period from both the Blackstone Group and Mr. Icahn, some of Dell would still be publicly traded.  Both of these offers are variations of a stub because some of the company would remain publicly traded.

JP Morgan advised the company that Dell’s financial flexibility would be severely limited with the two most mentioned alternative deals, which were borrowing money to either buy back stock or pay out special dividends. 

According to the bankers both options would limit the company’s cash flow substantially.  In addition, the dividend option would be more than what the company’s rivals pay in dividends and it would also confirm there was no room left for investment in the company.  

The bankers also discussed benefits and drawbacks of other possibilities.  Included were the offer of a strategic buyer to which bankers advised that a “strategic buyer for the entire company was unlikely” and a sale of Dell’s core – PC manufacturing to which bankers advised the “loss of scale and intersegment synergies and potentially diminished free cash flow and debt capacity” would ultimately hurt the company. 

Considering that these were the alternatives that directors had to consider at the time of the Dell and Silver Lake bid, there’s still more to come as directors deliberate on the Blackstone and Icahn bids.  With both bids including a stub and knowing the risks associated with a stub, we’re waiting to hear their thoughts.  In addition, the committee already turned down one plan to pay out dividends.   


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