by James Brumley | March 7, 2013 3:13 pm
Frankly, the way the Dell (NASDAQ:DELL[1]) saga has played out couldn’t have been better scripted by Hollywood screenwriters.
Just a little more than a month ago, founder and CEO Michael Dell offered to take the company private at $13.65 per share[2]. That was a 25% premium compared to where the stock was trading at the beginning of the year, and miles above the sub-$9 prices we saw in November.
At first glance, the offer was a way for many shareholders to make an exit at a far better price than could have been expected just a few weeks earlier. As is so often the case, though, the mere passage of time gave some shareholders a chance to reconsider, and a chance to make a plan.
We heard from one of those shareholders today — Carl Icahn, who owns a reported 100 million shares (worth $1.43 billion for a 6% stake) in the struggling computer company. In a curt letter delivered to Dell’s board of directors sometime Wednesday, the activist investor gave Dell an ultimatum: Pay a special dividend of $9 per share[3] and forget about going private, or prepare to face years of legal headwinds on top of a fierce proxy battle.
Oh, and if Dell just happens to need a bridge loan to make the $9 dividend happen, Icahn is more than willing to facilitate that loan.
The concept of putting pressure (via threats of legal action) on a board of directors to spur a dividend might seem familiar. It’s because David Einhorn was applying similar pressure to Apple (NASDAQ:AAPL[4]) less than a month ago, insisting that the iPhone and iPad maker let loose of its $137 billion cash hoard by issuing preferred stock that pays 4%[5], buying shares back or both.
Einhorn also threatened legal action that would force the board to put the matter up to a vote. Specifically, he was asking the company to unbundle the decision about issuing preferred shares from two other unrelated matters also up for a vote in February. Einhorn and Greenlight Capital argued that the preferred-share question should be voted on as a separate matter, rather than within a trio of issues that were going to be forced into an “all or none” outcome. He won that fight too, as a U.S. District Judge awarded the injunction he requested.
Although Einhorn has since dropped the whole matter, he made it clear that being vocal can indeed influence decisions. (And hold onto that “bundling” matter for a moment — that detail is going to come back to haunt us.)
Superficially, Icahn appears to simply be applying the same kind of leverage. But it’s not quite that simple.
Whereas Apple could afford to pay such a dividend, Dell can’t afford to pay out $9 per share. Icahn knows it, too, specifically suggesting in his letter to the board that the company could pay $4.26 per share with its current $7.4 billion in cash, $1.73 per share using current receivables, and the remaining $4.26 per share from $5.25 billion in new debt.
Yes, you read that right — Carl Icahn’s plan to reinvigorate the company that he says has real turnaround potential is by saddling it with more than $5 billion in new debt (on top of an existing $13 billion in long-term liabilities), all of which will be immediately passed along to shareholders. That debt would leave the company with little or no cash to actually, you know, work on the turnaround.
As backward and self-serving as Icahn’s logic is in the letter, it’s not the most disturbing part. Indeed, Carl Icahn is just trying to do what any major shareholder should do, which is get the most he can out of his stock. He’s not alone in thinking that Michael Dell’s offer of $13.65 is a lowball offer, and that DELL is worth much more. If his posturing is what it takes to unlock that value, then so be it.
But that’s not the issue that should concern investors at this point.
Had David Einhorn not explicitly cried foul when Apple bundled several matters into just one proxy vote heading into its late February meeting, it might not even be worth mentioning now. However, he did, so it’s worth pointing out that Carl Icahn is similarly crying foul … but in the opposite way. Icahn is insisting that Dell bundles at least two matters into one question when it’s time to cast votes at the upcoming shareholder meeting.
Specifically, Icahn Capital wants the decision to go private to be combined with the decision to pay the $9 dividend … meaning the company can’t do one without doing the other (pretty much ending the privatization plans as we know them).
The rub isn’t that Icahn wants a big cash payout, or even that he wants to be the financier of the bridge loans required to come up with the $9 per share Dell would need to pay the dividend. That’s just him taking a shot at a windfall.
No, the philosophical problem here is that these large, vocal and well-funded investors have the ability to frame proxy votes in ways that serve them.
Einhorn wanted to unbundle one of Apple’s voting matters to suit him, and Icahn insists that Dell does bundle two of its upcoming issues being put up for vote, as that will better suit his cause.
Either way, one thing’s become clear in just the last few months … activist investors have assumed a great deal of influence by being given the right to establish the agenda at shareholder meetings, the right to frame the verbiage of the questions being voted on, and by applying legal pressure to make it all happen. It’s so subtle that many investors haven’t noticed or cared.
But it’s the little things like this that chip away at rights traditionally held by shareholders of all sizes. We should be worried that a few privileged shareholders now speak for all shareholders, because those privileged few are first and foremost looking out for their own interests.
And the thing is, we let them.
If you think $13.65 is a fair price for Dell, take it. If you think Dell is worth more — and bear in mind that no other buyers have stepped forward yet — then hold out. Just know that if you hold out, the company might not be acquired or privatized at all.
Whatever decision you make, do it because you think it’s the best possible outcome.
As of this writing, James Brumley did not hold a position in either of the aforementioned securities.
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