What's Behind the Increased Buyout Bid From Michael Dell and Silver Lake

Michael Dell and the private equity firm Silver Lake increased their offer to take the computer company Dell private in a leveraged buyout not because they think the company is necessarily worth more, but because they want a change in the rules under which shareholders will vote on the transaction.

According to sources familiar with the situation, the new offer of $13.75 for all outstanding shares of the company, or 10 cents higher than the previous offer, amounts to only a minimal increase that adds about $150 million to the pot, and values the company at about $26.6 billion.

People familiar with the thinking behind the increase say the issue is not money, but the rules that the special committee of Dell's board overseeing the go-private process created at the start of the process. Under those rules, a shareholder who doesn't vote is the equivalent of a shareholder who votes against the transaction. The new offer is contingent upon those rules being thrown out.

When the first votes were tallied last week, un-voted shares amounted to about 27 percent of the total, or about double the 12 percent to 15 percent usually seen in situations like this. As one source close to the situation put it, there's a good chance that a majority of shareholders who favor the deal could outnumber those who actively vote against it.

But the scales could be tipped by the large number of shareholders who haven't voted and are for various reasons unlikely to vote. That would ultimately derail the transaction entirely.

"The presumption that these shares should be treated as if they had voted against the transaction is patently unfair," Michael Dell and Silver Lake said in a joint statement. (Read it in full below.)

That block of non-voting entities and individuals amounts to about 405 million shares and breaks down into four groups, according to people who have studied the situation.

As one source who requested anonymity put it: "It's a great big number and frankly no one modeled accurately."

One group is shareholders who owned the shares before the current record date of June 3, but who have sold them and therefore no longer have an interest in the outcome of the buyout battle.

A second group is institutional shareholders like sovereign wealth funds that have a policy of simply not participating in proxy votes of the companies in which they invest.

A third tier is comprised of shares held by banks and brokerage accounts on behalf of wealthy individuals who have a policy of not voting in proxy contests.

The last and probably the biggest block amounting to about 10 percent of shares outstanding, are ordinary retail investors, who may choose not to vote, or may not even know that the opportunity to vote exists.

Dell and Silver Lake have asked the special committee to change the voting rules to declare non-voting shareholders as uncounted votes, not "no" votes. The new proposed rules would count only votes of those shareholders who definitively vote one way or the other.

The special committee is expected to be amenable to the rule change, but wants a higher bid of about $14, according a report from Bloomberg News.

According to a person familiar with the history and tone of the negotiations, Dell's special committee insisted on the voting rules in order to improve the "optics" of the situation. It wanted to appear to be going the extra mile and beyond in order to preserve its neutrality

There are no provisions under Delaware law or in any other jurisdiction that requires non-votes to be counted as no votes in a proxy election. The Michael Dell/Silver Lake group opposed the rule during the negotiation process, but members of the special committee, led by Dell director Alex Mandl, insisted, and in the end it stuck.

No one in the investor group thought the fate of the entire transaction, which would be the largest private equity transaction since 2009, would hang on this rule. It may end up bringing the entire process to a screeching halt. If that happens, the prospect of an extended fight for control of the company and significant drop in the company's share price is very real.

Here's the Dell/Silver Lake statement.

Statement of Michael Dell and Silver Lake

July 24, 2013 - Michael Dell and Silver Lake Partners released the following statement today:

Under current provisions, shares that don't vote are counted as votes against the transaction for purposes of determining whether a majority of the unaffiliated shares wish to accept our offer. According to our latest tally, approximately 27% of the unaffiliated shares have not yet been voted. The presumption that these shares should be treated as if they had voted against the transaction is patently unfair.

We believe that $13.75 per share is a full and fair price. We also believe that the decision of whether to accept this offer should rest in the hands of the unaffiliated shareholders. The will of the majority of the unaffiliated shares voting on the transaction should not be thwarted by an unfair standard that counts unaffiliated shares not voting as "no" votes. We believe that the vote of the majority of the unaffiliated shares voting on the transaction should be respected, and that if this majority wishes to accept our offer, it is only fair to permit them to do so.

In our proposal to the special committee, we also left it open for them to decide whether to change the record date. We believe a change in the record date is essential as it would give shareholders time to process and vote on our new proposal.

Carl Icahn Blasts Michael Dell's Latest Buyout Offer With Twitter Poetry

Yesterday, it was references to Bob Dylan lyrics. Today, Carl Icahn, the activist investor seeking control of the computing company Dell, blasted the latest buyout offer from its founding CEO and board of directors with a short rhyme on Twitter:

All would be swell at Dell if Michael and the board bid farewell.

- Carl Icahn (@Carl_C_Icahn) July 24, 2013

He later followed up that tweet with another of his open letters to Dell shareholders, calling for the ouster of CEO Michael Dell and the company's current board of directors.

The latest buyout offer from Michael Dell and Silver Lake values the company at $13.75 a share, or $24.6 billion. The offer is contingent on a change in the rules of the buyout process that counts non-votes as essentially equal to "no" votes on the proposed buyout. (See this earlier post for a detailed explanation.)

Icahn called that provision "the one thing protecting the interests of Dell stockholders," and went on to say that "... To change the rules at the last minute is outrageous." He repeated previous complaints about the $450 million breakup fee that he says Silver Lake would receive in the event the buyout doesn't close, and called on the board to eliminate that provision. He also repeated a call for Dell's board to convene its annual meeting of shareholders, and to hold a proxy vote that would include a slate of directors he has proposed to oversee the company.

His latest letter is below:

Dear Fellow Dell Stockholders and Special Committee:

In today's latest installment of the "Desperate Dell Debacle," Michael Dell/Silver Lake have asked the Company to change the rules of the game in a transparent attempt to force their freeze out transaction across the finish line despite the vote of its stockholders. In a Merger Agreement with widely-criticized protective devices in favor of Michael Dell/Silver Lake and a sales process that included a number of advantages for Michael Dell/Silver Lake, the one stockholder protection was the requirement that a majority of the non-Michael Dell shares approve the deal. The Special Committee has now been asked to GUT this provision to effectively render it meaningless. And, in return, Michael Dell/Silver Lake have offered to increase the deal price by $0.10, or 0.73%!

The Merger Agreement and the Proxy Statement established the rules. We and other stockholders have spent time and money understanding the rules created by Michael Dell, Silver Lake and Dell, and we have played by them. To change the rules at the last minute is outrageous. And, in this case, it appears the Special Committee may even agree with us, or at least they did back in February, when Dell, Michael Dell and Silver Lake ALL AGREED IN WRITING in the Merger Agreement that the required stockholder approvals "shall not be waivable." SHALL NOT BE WAIVABLE. Perhaps that means something else to Michael Dell/Silver Lake and the Special Committee, but to us, it means what it says - You can't get rid of this one provision that is designed to protect the interests of non-Michael Dell stockholders. Of course, this is precisely what Michael Dell and Silver Lake are today trying to do.

Michael Dell/Silver Lake this morning commented that the stockholder approval requirement is "unfair". Are they serious? They're complaining about the fairness of the Merger Agreement that they and their lawyers negotiated and agreed to! How is it fair to change the rules at the end of the game, particularly when they and their teams of lawyers established the rules? If they are so concerned about fairness, then let's discuss and actually make the Merger Agreement fair - let's get rid of the outrageous $450 million break up fee and change the definition of a Superior Proposal so it actually encourages competing bids. It's outrageous to construct a merger agreement where a competing bidder does not get compensated with a break up fee if they are matched or topped. By not allowing this, it is virtually insurmountable to incentivize banks to finance a higher bidder.

We have spent the past 6 months explaining why we believe that not only does the Michael Dell/Silver Lake transaction undervalue the company, but it also freezes out loyal stockholders who deserve the opportunity to stay with Dell. How is that fair? In short, we have explained why we believe Michael Dell is doing a great disservice to his stockholders and has structured a deal that we believe is unfair. Today, Michael Dell and Silver Lake crossed the Rubicon by trying to take away the one provision in the Merger Agreement that actually provided stockholders with a voice in their company. It is time for Michael Dell and this Board to go. After more than a year since the last annual election, it is time to schedule the 2013 Annual Meeting and move forward.

A few days ago we warned this Board not to run the Company like a banana republic. Some commentators have even compared this "Desperate Dell Debacle" to Vladimir Putin and North Korea! After this latest action by Michael Dell/Silver Lake, we are clearer than ever - it is time for Michael Dell and this Board to go.

Michael Dell Is "At Peace" With Whatever His Shareholders Decide

Asa Mathat | D: All Things Digital

Michael Dell made what reads like his final appeal to shareholders of the computing company that bears his name, seeking their approval of a $24.6 billion leveraged buyout he has proposed with the private equity firm Silver Lake.

"The decision is now yours. I am at peace either way and I will honor your decision," Dell wrote in an open letter filed with the U.S. Securities and Exchange Commission early this morning.

The letter came after a day of significant developments in the ongoing drama surrounding the fate of what was once the world's largest supplier of personal computers. Dell and Silver Lake raised their bid by a dime to $13.75 a share in the hope of convincing the company's board to change some of the rules governing the shareholder vote. Naturally, that didn't sit well with Carl Icahn, the activist investor stalking the company with a competing shareholder proposal of his own. He resorted to writing verse on Twitter to make his case.

Without mentioning him by name, Dell criticized some of the proposals floated by Icahn, including the sale of assets and a leveraged recapitalization, saying they would be "destructive to the company." Should the buyout be rejected by shareholders, he said he won't support any of Icahn's proposals. Dell remains the company's largest single shareholder, with about 14 percent to 15 percent of the shares outstanding.

Dell also reiterated the case he and Silver Lake made in a joint letter yesterday, saying the "non-vote-equals-no-vote" provision of the shareholder vote process is unfair. "Currently, over 25 percent of the unaffiliated shares have not voted," he wrote. "This means that even if a majority of the unaffiliated shares that vote on the transaction want to accept our offer, the will of the majority may be defeated by the shares that do not vote. I think this is clearly unfair."

The special committee of Dell's board hasn't yet formally responded to the latest offer.

Dell's full letter is below:

Dear Fellow Shareholders,

You have undoubtedly read many stories about our efforts to take Dell private. I wanted you to hear directly from me.

I believe that taking Dell private is the right thing to do for the company. We need to transform, and we need to do it quickly. The transformation is not without risks and challenges, and I believe that we can do what we need to do better as a private company than a public company.

When I came to the Dell board last August to ask if the board would consider the possibility of a going private transaction, I understood that the independent directors would control the process, and I made clear that I was ready to partner with whoever would pay the highest price. I encouraged every interested party to pay the highest price they could.

After one of the most thorough processes in history, the highest price that any of the parties was willing to pay was $13.65 per share. Although no other party has offered to pay more than $13.65 per share, Silver Lake and I have now increased our offer to $13.75 per share, an increase to public shareholders of approximately $150 million, which is our best and final offer.

I believe this offer is in the best interests of the company and our shareholders. Certain other parties have been proposing alternatives such as leveraged recapitalizations, sales of assets and other steps that I believe would be destructive to the company and that I do not and will not support.

The decision is now yours. I am at peace either way and I will honor your decision. Our agreement requires the vote of a majority of the unaffiliated shares - your shares - to approve the transaction. Unfortunately, our agreement also provides that shares that do not vote count as votes against the transaction.

Currently, over 25 percent of the unaffiliated shares have not voted. This means that even if a majority of the unaffiliated shares that vote on the transaction want to accept our offer, the will of the majority may be defeated by the shares that do not vote. I think this is clearly unfair.

When we offered to increase our bid to $13.75 per share, we also asked the Special Committee of the Board to change this unfair vote standard and allow the will of the majority of the unaffiliated shares that vote on the transaction to control the outcome.

Particularly given the efforts of others to promote alternative transactions, and the ability of those parties to vote their shares when my shares do not count, it makes no sense whatsoever to skew the playing field even further by counting shares not voting as if they supported the opposition group.

If the Special Committee agrees to our increased bid of $13.75 per share, and agrees to create a fair and level playing field in which you can decide, I will look forward to your decision.

Sincerely,
Michael S. Dell