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More naysayers pour cold water on Dell LBO

Dell and Silver Lake rumored to contemplate higher bid

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Dell, the company, might want to be more like IBM, but this leveraged buyout takeover bid that Michael Dell and Silver Lake Partners have put together is starting to smell more like the Hewlett-Packard acquisition of beleaguered Compaq more than a decade ago.

Southeastern Asset Management, which owns an 8.4 per cent stake in Dell, has already said that it won't go for the deal that allows Dell, the man, to take the IT giant private for $13.65 a share, or around $24.4bn. In a lengthy analysis, SAM explained that the deal was "woefully inadequate" and undervalued Dell by nearly a factor of two. This might have something to do with whatever price SAM has paid for shares over the past year, and the rumors going around Wall Street speculate that it is considerably higher than the $13.65 deal price. Hence SAM's displeasure.

T Rowe, wrong Price

Late yesterday, mutual fund T Rowe Price, which owns a 4.4 per cent stake in Dell and which is the third largest shareholder after Michael Dell and SAM, is saying no deal. The company did not do an elaborate analysis like SAM, but rather put out a simple statement, which came from chairman Brian Rogers: "We believe the proposed buyout does not reflect the value of Dell and we do not intend to support the offer as put forward."

So that is 12.8 per cent of the shares in the Nay column versus Michael Dell's 14 per cent of the shares in the Yay column.

Now other investors may start to pile on, and the speculation on the street is Dell-Silver Lake will have to raise the LBO price to get the deal done. Financing a $42.2bn takeover – at nearly $24 per share – as SAM is suggesting is not going to happen. No one has the stomach for that kind of deal at the moment. But it is conceivable that the deal could get done at maybe $14 to $16 per share, as rumors suggested the deal price was going to be ahead of when the LBO was announced on February 5.

Dell, the company, has been quiet about all of this haggling about the price, except for the following statement it filed with the US Securities and Exchange Commission on Monday:

In the course of its deliberations, the Special Committee of Dell's board considered an array of strategic alternatives. In addition to working through financial and capital allocation issues with its independent financial advisors, the Committee retained a prominent management consultant to help it assess the company's strategic position. Based on that work, the board concluded that the proposed all-cash transaction is in the best interests of stockholders. The transaction offers an attractive and immediate premium for stockholders and shifts the risks facing the business to the buyer group. In addition, and importantly, the go-shop process provides stockholders an opportunity to determine if there are alternatives that are superior to the present offer.

If Michael Dell wanted to save his legacy, perhaps the best thing to do would be to sell off the PC business to Lenovo, as IBM has done, and pocket a few billion, and then repatriate the offshore profits that are sitting in various Dell divisions outside the United States, which would net another $9.25bn or so, according to SAM's math.

SAM wants Dell to sell off Dell Financial Services, its financing arm, for $3.1bn or so, but that is dumb. You keep that and finance gear and make money. Then you write off the value on those $13.7bn in acquisitions that Dell has done since 2007, and this hammers the stock down even more (perhaps, perhaps not).

And at that point, if Michael Dell really wants control of the company that bears his name, he liquidates all of his assets at MSD Capital, his own venture capital arm, and puts its $12bn into buying Dell shares alongside the cash the company has. And voila, Dell is a private company and shareholders get totally crushed.

Imagine the lawsuits. Lawyers must be praying for this sort of thing as much as asset managers are praying for a big payoff. ®

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