Icahn in control after Dell ups offer to take company private

Carl Icahn's proxy battle likely forced Michael Dell and Silver Lake to improve its offer to $13.75 per share to take over Dell

Michael Dell and Silver Lake's decision to raise the offer to take Dell private is a concession that rival Carl Icahn and affiliate parties may have an upper hand in the wrangling to take over the company, observers of the deal said.

Founder Dell and Silver Lake on Wednesday offered shareholders US$13.75, an increase from the original offer of $13.65 proposed in February, which was met with opposition from Icahn and other institutional investors, who believed the company was being undervalued.

Icahn has led the fight against Dell, playing a major role in getting the company founder and CEO to increase his offer, observers said. Icahn and Southeastern Asset Management made several counteroffers to the Dell-Silver Lake proposal, and Icahn claimed the most recent counteroffer could be potentially worth $15.50 to $18 a share for current shareholders.

A vote to approve the new Dell-Silver Lake proposal is scheduled for Aug. 2. Dell on Wednesday delayed the second shareholder vote on the Dell-Silver Lake proposal. Dell perhaps failed to gain enough shareholder backing to approve the deal, observers said.

Dell also changed the way shareholder votes will be counted next week. Under the new guidelines, votes that say "yes" or "no" will be counted, and non-votes or abstentions will not count.

"According to our latest tally, approximately 27 percent 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," Michael Dell and Silver Lake said in a statement Wednesday.

Icahn responded via Twitter: "All would be swell at Dell if Michael and the board bid farewell."

While the value of Icahn's deal has been questioned, his proxy battle has convinced enough shareholders that they were not getting enough value from Dell's original offer, said Anthony Sabino, a corporate lawyer and law professor at St. John's University in Queens, New York.

"Icahn is definitely in control and has Michael Dell precisely where he wants him. One, he has forced Dell to up his bid," he said.

Icahn can stand pat or raise his bid, and the response from Dell and Silver Lake could be to increase the bid yet again, Sabino said.

"This will not end soon nor will it be pretty. Expect a protracted and ugly battle, and who knows, third-party bids intervening," Sabino said.

Icahn's current proposal remains $2 to $4 more per share than Dell's counterproposal and there is little need for Icahn to budge, said Jason Schloetzer, assistant professor of accounting at Georgetown University's McDonough School of Business.

"Icahn is playing the role of maximizer. He has a credible alternative plan for Dell shareholders and he is using the plan to nudge Michael Dell-Silver Lake into paying a higher price to take Dell private," Schloetzer said.

But Dell is smart and won't allow himself to get pushed around, Schloetzer said.

"We can think of this situation as an auction. Michael Dell-Silver Lake know the price that they are ultimately willing to pay. I really doubt that Icahn wants to implement his plan, but instead is seeking a higher price from Dell-Silver Lake," Schloetzer said.

In an effort to get the Michael Dell-Silver Lake deal out of the picture, Icahn issued an open letter Tuesday, urging Dell shareholders to complete the vote Wednesday.

"We think that -- after six months -- the time for soliciting is over. It's time to vote. Do not move election day again. This is not a banana republic," Icahn wrote in a letter to the company's special committee, which is charged with reviewing offers to take the company private and is backing the Dell-Silver Lake proposal.

Icahn has a history of opposing such deals involving technology companies. Icahn dueled with Yahoo's board in 2008 after the company rejected a buyout offer from Microsoft.

Icahn's duel with Dell is purely about dollars and not the company's future business strategy, said Charles King, principal analyst at Pund-IT. Icahn's deal looks better on paper, but if he takes over the company, he will struggle to direct the company's strategy going forward, King said.

The company's business largely revolves around the struggling PC market, but it hopes to increase its presence in the enterprise market.

"If Icahn wins the support of shareholders, I wish him and the company well," King said. "In a case like this, the monetary value that shareholders receive is not everything involved."

The deal offered by Icahn may be higher, but it will strap Dell for cash on hand and load the company with debt obligations. That is not good for the company in the long run, King said.

But Dell has made some shrewd deals in the past, acquiring dozens of companies since 2007 from which good value has been squeezed. Dell has not overpaid for companies compared to, for instance, Hewlett-Packard, which overpaid for companies like 3Par, Autonomy and Palm.

"Michael Dell has put a lot of thought [into] the company's value at this point," King said. "He certainly wants to get a good deal."

Agam Shah covers PCs, tablets, servers, chips and semiconductors for IDG News Service. Follow Agam on Twitter at @agamsh. Agam's e-mail address is agam_shah@idg.com

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