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Friday, 01 August 2014

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Flawed Dell compromise saves faces all round

A flawed compromise on the buyout of Dell will save faces all round. Letting the $24 billion transaction fade away would have hurt most shareholders, the board and the company’s eponymous founder. A 2 percent hike in the offer price by buyers Michael Dell and Silver Lake Partners in return for a tweaked voting procedure won’t delight anyone - but it should seal the deal.

Rather than going to a vote on Friday that risked killing the deal, almost everyone had reasons to compromise. Selling shareholders will get up to $450 million more, votes that aren’t cast won’t count against the deal, and a changed record date will mean a different mix of owners when ballots are counted on Sept. 12. These shifts ought to ensure Dell goes private as planned.

Investors don’t have much choice. The company is in worse shape now than it was when the founder’s $13.65-a-share bid emerged in February. The PC market is shrinking at a 15 percent annual rate, faster than thought six months ago. Dell’s stock would surely fall precipitously if the deal falls through.

The flaky alternative proposed by activist Carl Icahn - more debt, a big dividend and a stub of equity that’s supposed to more than make up the difference in value - looks risky. Icahn won’t like the new deal, but at least he and other arbitrageurs stand to make a slim profit. Long-term owners such as Southeastern Asset Management who loudly proclaimed the stock was worth close to twice as much will have to admit that kind of valuation is unrealistic today.

Dell’s board also had few options. Directors changed the voting procedure in exchange for a relatively small bump in price and a concession on breakup fees. That’s better than recommending a deal investors don’t accept, and then seeing them suffer losses.

For his part, Michael Dell’s credibility would have suffered had the vote gone against him. Having kicked in a bit more cash to push the purchase across the line, he’ll have more autonomy to turn the company around - even assuming he would have been allowed to remain as chief executive with a different outcome.

There’s even a bright spot for Silver Lake. The private equity shop is buying a company whose prospects are looking less promising by the day. But the firm will avoid the reputational damage that might have occurred had it walked away. There may be grumbles on all sides - but the alternative would have been worse.

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Michael Dell and Silver Lake on Aug. 2 agreed to raise their $24 billion buyout offer for Dell from $13.65 a share to $13.75 a share and to pay a special dividend of 13 cents per share. In addition, they will guarantee payment of the company’s third-quarter dividend of 8 cents per share.

The changes will increase the total consideration per share up to 2 percent and raise the proceeds received by shareholders unaffiliated with the buyout group – some 85 percent of the holders – by $350 million to $470 million, depending upon the closing date.

In exchange, the special committee of Dell’s board has changed the record date for shareholders voting on the transaction to Aug. 13 and postponed the vote until Sept. 12.

In addition, the breakup fee payable to Michael Dell and Silver Lake in the event the merger is terminated within 12 months and the company recapitalizes itself without an absolute majority stockholder has been cut from $450 million to $180 million, reducing the cost to Dell if the deal is voted down and a recapitalization takes place along the lines proposed by activist investor Carl Icahn.

This item’s reference to Southeastern’s valuation of Dell in paragraph four has been corrected.

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