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The rub to stub

25 Mar 2013 By Robert Cyran

Blackstone and Carl Icahn are likely to stub their toe on Dell. Both are offering more for the computer maker than the $24.4 billion from its eponymous founder. But the new bids rely on existing investors keeping a small public stake. In theory that obviates the need to get Michael Dell’s support. In practice, the downsides of such stub equity make it a long shot.

Several major investors have expressed unhappiness with Michael Dell’s offer, with the likes of Southeastern Asset Management threatening to torpedo it for being too low. Dell and his partner, Silver Lake, are reluctant to raise the price. And without Michael Dell’s assistance, the $8 billion or so of equity needed is beyond the reach of any one rival buyout firm.

Letting existing shareholders keep a stake could square this circle. It should bring onside dissident investors convinced the company is worth far more than $13.65 a share. And Blackstone or Icahn wouldn’t have to cut such a big equity check.

It also introduces many potential problems. Minority investors would have little control over where or how Dell is being run. There’s no assurance independent directors will be appointed to look after their interests. That means the voting and economic rights attached to the stub equity will need to be negotiated carefully. That could be a stumbling block.

Without sufficient protection, managers could potentially pay themselves generous bonuses and fees, or majority investors could force an early exit. Finally, the remaining stock is likely to be more volatile and less liquid. Icahn’s proposal is particularly troublesome as some shareholders may be forced to keep a stake rather than having a choice, as Blackstone is offering them.

It’s not a free lunch for private equity either. Dell would still be publicly traded, so would have to disclose more information than a traditional buyout. That would expose the company to greater attention while it undergoes a necessary restructuring – something private equity firms are more comfortable doing out of the spotlight.

A stub equity deal isn’t impossible – Clear Channel deployed the structure during the buyout boom. But it wouldn’t be easy to accomplish. A raised bid by Silver Lake and Michael Dell would be an easier path to a successful buyout.


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