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Icahn, SAM to give MickeyD the boot if they take over Dell

Dell board very politely says 'Put up or shut up'

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Michael Dell wants to take his company the company that bears his name private, but he might be polishing up his resume instead in a few months.

Activist investor Carl Icahn and Southeastern Asset Management made it clear last Friday that they were not happy with the proposed $24.4bn takeover of Dell by the company's founder, Silver Lake Partners, Microsoft, and a slew of banks. Later in the day, Icahn also made it clear that he was ready to file papers to propose a new slate of directors by the Monday deadline, and perhaps more significantly, that should he get a new board elected after a proxy fight, Michael Dell would be given the sack as CEO and chairman.

In a lengthy interview on Bloomberg TV, Icahn outlined a deal that would repatriate around $7.8bn in cash from overseas and borrow another $5.2bn from Icahn Enterprises, Jefferies & Co., and other investors, and distribute $12 per share to current holders of Dell, leaving them still owning their stock.

This is not taking Dell private, but rather a leveraged recapitalization by Southeastern Asset Management, which owns an 8.4 per cent stake in the company and is the largest shareholder outside of Dell, the man, who has a 14 per cent stake. Together, Icahn and SAM have a 13 per cent stake in the IT giant, which by many ways of looking at it is worth about twice the $24.4bn that Dell & Friends are willing to pay for it. The only problem is that no one wants to pay anywhere near what Dell, the company, is in theory worth.

The way Icahn sees it, Dell shareholders should be given back the cash Dell is hoarding plus a little bit more thanks to the $5.2bn in bridge loans that Icahn wants to do. And under his deal, $12 per share would be distributed to each shareholder. By the way, that would give Icahn and SAM together just under $3bn in cash, and Dell, the man, around $3.2bn, so either way, they win.

Funny how that works out, eh?

Dell & Friends are willing to pay $13.65 per share to take the company private, so by Icahn's math, if you subtract $12 from $13.65, that means Dell is being valued at a mere $1.65 a share based on the price that Dell & Friends are willing to pay. And the entire Dell business, Icahn says, is worth a lot more than $1.65 per share, and presumably even after it has had all of its cash sucked out and has been loaded up with debts.

Icahn said in the interview that the PC business is "extremely attractive" in the short term, because PCs are not going to just go away, and added that if his proposed board took over Dell, then it might acquire the PC business of rival HP or merge the Dell and HP PC businesses to get some economy of scale.

The one part of Dell that Icahn and SAM are not intent on keeping is Big Mike himself. "We have got nothing against Michael Dell, but we don't think he is doing a good job over there," Icahn told Bloomberg. "We think we need a new CEO that a new board will elect."

The usual suspects are floating around: Oracle president and former HP CEO Mark Hurd, former Compaq and current VCE CEO Michael Capellas, and former Oracle president and current Infor CEO Charles Phillips.

Maybe Dell, the man, is trying to take the company that bears his name private on the cheap, but it is hard to argue that Dell has not done a good job peddling servers, outgrowing the market significantly, and building up a sizeable software business in a short time.

What Dell did not do is see how the rise of smartphones and tablets would necessitate cheap notebooks that don't have much or any profit margin and how tying itself too tightly to Intel and Microsoft would have repercussions. HP missed the same boats, and if IBM still had a PC business, you can bet MickeyD's last dollar that Big Blue would have screwed this up, too.

It's hard to live through jarring transitions, and companies usually don't do it. IBM has survived for so long because it had punch card and then mainframe monopolies to stabilize its revenues and profits, but neither HP nor Dell have such broad and deep markets in which they can right themselves thanks to. Both thought services might be a stabilizer, which is why they spent so much dough on EDS and Perot Systems, respectively. Both were wrong – that was so 1995. And now both are trying to build up cloudy infrastructure businesses because they think they can build some stability by emulating Amazon Web Services. And this will only destabilize them further.

It is going to be much more fun writing about IT than it is going to be trying to convert hardware and software companies into cloudy services companies. By definition this means collapsing profits that none of the IT giants can afford to see go away. But if they don't get lean and mean, Amazon will be glad to steal the biz away.

On Monday morning, the special committee at Dell that is considering the Dell & Friends deal as well as the proposed acquisitions by Icahn Enterprises and Blackstone Group when they had deals on the table – and the criticisms of the Dell & Friends deal by both Icahn and SAM – said in a statement that it wanted more information on the proposed leveraged recapitalization deal that Icahn and SAM want to see get done.

That deal would give shareholders $12 per share and they would still get to keep their Dell shares, or shareholders could forego the cash and take $12 in shares, with each share being valued at $1.65 a pop. (Icahn and SAM don't know how much cash they would need because they can't tell which way shareholders would go.)

The Dell special committee wants to see a draft of the leveraged recapitalization agreement so they can see the full terms of the deal, and also wants to see details of the financing for the deal. The Dell board also wants to see a commitment letter for whomever is willing to buy Dell's receivables, and said it would also need to see a working capital plan because once all of the cash is sucked out of Dell, the company, it will need cash to operate.

The Icahn-SAM deal also assumes that the big holders of Dell shares, amounting to 20 per cent of the company's outstanding shares, will take stock instead of cash – and Icahn is one of those investors, by the way. This is a way to take a 4.6 per cent stake worth around a $1bn today and turn it into a much larger number of shares that could, in theory, be worth a lot more in a fairly short period of time depending on how Wall Street reacts to the deal.

Dell's board wants to know who Icahn and SAM want to be the senior managers at the company, and also wants to know the details of whatever deal the two have made between themselves.

Your move, Carl. ®

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