Original URL: http://www.theregister.co.uk/2013/03/11/dell_bucks_up_employees_icahn_sam_loom/

Keep calm and carry on flogging: Dell soothes troops as buyout looms

Or unravels, depending on how you look at it

By Timothy Prickett Morgan

Posted in Business, 11th March 2013 13:03 GMT

Analysis While IT, finance and private-equity barons plot the fate of tech giant Dell, its employees have to get on with making, selling and supporting the company's myriad products.

And in the past month, they have had to field a lot of questions from customers asking about the proposed $24.4bn leveraged buyout deal that company founder Michael Dell - and his financing friends at Silver Lake Partners, Microsoft and a slew of banks - has put together to get Dell, the company, off Wall Street.

Dell, the man, wants everyone to settle down and stay focussed on peddling products. And to that end, the management team at Dell, the company, issued a letter to its 109,000 employees on Friday telling them to not get rattled by the buyout deal and all the talk surrounding it.

That's a little easier said than done as vulture investor Carl Icahn (no relation to El Reg) circles overhead with an estimated five per cent stake or so in the company; if Icahn upsets the deal, he could force Dell to give out an immense cash dividend to shareholders instead, which Southeastern Asset Management (SAM), Dell's largest outside shareholder, wants the company to do.

SAM argued soon after the buyout deal was revealed that Dell should borrow $9bn and sell off Dell Financial Services for $3.1bn and distribute this, plus some of its cash hoard, as a special $11.86 per share dividend. This would suck all the cash out of Dell on a net-cash basis, by the way.

The Wall Street Journal reported late last week that Icahn approached the Dell board to make a bid for the company, which didn't happen. In a filing with the US Securities and Exchange Commission (SEC), we learn that Icahn's calculations show Dell to be worth something on the order of $22.81 per share, a little lower than the $23.72 per share that SAM came up with. But it's still a much bigger number than the $13.65 big that Michael Dell & Friends are ponying up to take the company private.

Like SAM, Icahn wants a big cash payout for Dell shareholders. In this case, Icahn says take the $7.4bn that Dell, the man, is willing to allocate from the cash hoard of Dell, the company, then another $3bn in receivables on the books plus a borrowed $5.25bn in debt (washed against the cash not brought home from overseas markets) and pump out a $9 per share special dividend.

Again, both of the proposals from SAM and Icahn would leave Dell essentially cashless. Why this is good for Dell customers, Dell employees, or Dell as a company is unclear. But what is clear is that it would be a windfall for Dell shareholders like SAM, Icahn, and even Michael Dell himself, who has a 14 per cent stake and who would receive a $2.2bn dividend if the Icahn plan were instituted - or $2.9bn if the SAM plan was done.

SAM has an 8.4 per cent stake and would get $1.7bn under its own plan and $1.3bn under the Icahn plan, while Icahn would get just a hair over $1bn under the SAM plan and something on the order of $780m under his own deal.

Not bad money for a few weeks of work, if you can get it.

It may seem as though this Clash of the Titans-like face-off has nothing to do with Dell, the IT supplier and the employer, but obviously it does.

Frankly, whatever future Dell faces, being private or not will not affect its outcome as much as intelligently applying its cash and cash flow to buying good companies and building better products that serve the IT needs of enterprises. Those who argue that Dell, the man, is trying to buy his company low so he can get all the upside for himself may have a point. But sucking the marrow out of Dell, as some investors want, surely makes no business sense at all, even if you can't blame them for trying.

Instead of shorting Dell's stock, they are quite literally shorting its future by making it more difficult for Dell to compete. They are trying to get the upside before it even gets here – just like they insinuate Dell, the man, of doing by taking Dell private at such a low valuation.

Under the logic of SAM and Icahn, all public companies with big piles of cash would be compelled to distribute it all to shareholders whenever some rich equity kingpin got cranky or the multitudes did, leaving their options for acquisitions or R&D significantly limited.

If stock prices for public companies and implied values for startups were not so overinflated, this might not matter. But everything out there is expensive. Slap storage, cloud or software-defined networking on something and it is very pricey indeed, and these are the things Dell needs to acquire or build.

Dell was on the ball with PCs and servers - then Amazon turned up with its cloud

What Dell, the man, absolutely understands is that it is cheaper to build a future you create and control with research and development, and sales and marketing, than it is to buy it at hyper valuations.

Like Dell used to do with its PC business back in the day, and like it did with servers back in the late 1980s and early 1990s as it entered the server racket to take on incumbents. And as it did brilliantly with bespoke hyperscale servers for the past several years, a market where it has a whopping 50 per cent share.

But you can't miss the tablet and smartphone revolutions without repercussions, and you can't launch your public cloud six years after Amazon and then also be behind the company in terms of features, pricing, and services. Dell is no worse than rivals Hewlett-Packard and IBM in this regard. But this is how companies don't live a century if they are not careful. IBM had several near-death experiences, and it is helpful to remember that Apple did, too. And neither had to go private to fix themselves.

In the meantime, Dell's top brass has to buck up the troops. And to that end, the management team (not signed by Michael Dell or anyone) sent out a letter to employees, which was filed dutifully with the SEC as all of Dell's comments about the leveraged buyout deal and its criticisms have been to date.

"As expected, this proposed transaction has generated significant interest and commentary from media, investors, and other stakeholders," the letter reads, adding:

There will continue to be speculation, conjecture, and uncertainty as the process moves forward. We want to assure you that this is all part of the process being led by our Board of Directors, and we ask that you keep these developments in proper perspective and keep in mind the following.

Today, we remain a publicly-traded company and will continue to operate as such on behalf of our stockholders. It is important to remain focused on serving our customers, providing them a superior experience and the products and solutions to help them do and achieve more.

We are committed to being a best-in-class solutions provider, and as a private company will be better able to shape our long-term vision for the future of technology – and the ways it can help all our customers achieve their goals.

Dell reminded employees that the "go shop" period being administered by Evercore Partners to find a better deal, ends on 22 March. And that the company's plans to cut costs and boost productivity to the tune of $2bn in fiscal 2014 (which ends next January) remains in effect, and that should a better deal not arise, then it expects the Dell-Silver Lake deal to close before the end of the second quarter of this fiscal year, which ends in July.

We shall see. Dell shareholders, and not just SAM and Icahn, are going to have a lot to say about whether or not $13.65 a share is a fair price. The arguments that SAM and Icahn have made that the deal does undervalue Dell are compelling. But that doesn't mean the answer is to borrow money and sell off assets to pay a big fat juicy dividend.

Bootnote: Just after this story ran, Icahn Enterprises, the partnership controlled by the man with the same name, had let it be known to the major biz press outlets that it had inked a confidentiality agreement with Dell so it could get a look at its books. ®