Dell could be unstable if an alternative bid is accepted, analysts say

Blackstone and Icahn care more about the returns than the Dell's long-term strategy, which could hurt customers

A long battle looms as bids are evaluated to take over Dell, but analysts are warning customers of operational instability if an alternative proposal to acquire the company is accepted.

Blackstone Group and Carl Icahn have made counterproposals to acquire Dell, competing with a $US24.4 billion bid from company founder and CEO Michael Dell and Silver Lake partners.

A group led by Blackstone offered in excess of $US14.25 per share, while Carl Icahn and affiliates offered $US15 per share. Michael Dell and Silver Lake offered $US13.65 per share when it first announced its intent on February 5 to take Dell private.

Dell in a statement said that a special committee would investigate the counterbids, which "could reasonably be expected to result in superior proposals, as defined under the terms of the existing merger agreement." The board will continue to support the original $US24.4 billion until the alternative proposals are reviewed. The board has the option to terminate that agreement.

Research firm Ovum is recommending that large- and midsize enterprise CIOs start risk mitigation planning in the event that Blackstone or Icahn come out on top and take over Dell.

"Neither Blackstone and Icahn care one bit about whether their 'financial engineering' to extract cash from Dell will negatively impact Dell's enterprise customers," said Carter Lusher, chief IT analyst of software and enterprise solutions at Ovum, in an email.

Blackstone or Icahn would cripple Dell's ability to deliver enterprise technology and services in the short term, and innovation over the long term, Lusher said.

Michael Dell's influence may wane if he loses the bid, which could throw the company in a different direction than it has been going, analysts said. Blackstone or Icahn could disrupt the company's operations and move away from the long-term plan of focusing on enterprise products.

Dell and his group have been outbid and the takeover price for Dell will likely go up, said Anthony Sabino, a professor at St. John's University's Peter J. Tobin College of Business.

"They have to increase their bid in order to stay in the game," Sabino said.

The bidders will likely engage in a public battle to win over shareholders, Sabino said, adding that the best offer will prevail.

If Michael Dell endorses one of the competing bids that could shorten the time required by the board to close a deal, said Charles King, principal analyst at Pund-IT.

Since rejoining the company in 2007, Dell has kept the company disciplined about chasing its long-term goals while also preserving the cultures of some 25 companies it has acquired over the last six years.

"If a new organization took over ownership, chances are Dell's corporate culture will suffer," King said.

Under a new ownership, Dell could have different leadership and potentially commit to a new strategy, said Alex Khutorsky, managing director of The Valence Group, a merger and acquisition advisory firm. The board will weigh the bids it has received as well as who is behind them, he noted, but the "who" is not likely to be what drives its decision.

"Other than in a fully financed, all-cash bid, a bidder's reputation is always a factor in a board's bid evaluation," he said. "Having said that, it's rarely the deciding factor."

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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Agam Shah

IDG News Service
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