A proposed buyout of computer maker Dell Inc. appeared less likely Thursday after activist investor Carl Icahn said Dell should remain a public company and reward shareholders with a big, one-time payout.
The proposal further muddies a deal that already faced uncertain odds. Some of the company's biggest shareholders already had objected to the proposed buyout by founder and CEO Michael Dell. They say Dell's $24.4 billion offer undervalues the company.
In a letter dated March 5, Icahn said the company is worth far more than the $13.65 per share offered by Dell and his partner, investment manager Silver Lake.
Icahn wants shareholders to have a second option when they vote on the buyout. If Dell's offer is rejected, Icahn wants the company to pay shareholders a special dividend of $9 per share, financed with existing cash and new debt. He says the payout will compensate shareholders for the company's weak performance while allowing them to profit from Dell's eventual recovery.
If Dell's board won't agree to make the offer, or to allow voting on new directors who would support it, Icahn said he expects "years of litigation ... challenging the transaction and the actions of those directors that participated in it."
The core question for shareholders is whether Dell is earning enough cash to shoulder the additional debt and grow. Like other computer makers, Dell is navigating weakening demand for personal computers. Consumers are doing more of their computing on smartphones and tablets.
If Dell endured this challenge and grew, Icahn's proposal would be a boon for shareholders, said Ed Mullane, an editor with dealReporter, an industry publication covering mergers, acquisitions and other corporate events.
Taking on debt to afford a special payout, a process known as "leveraged recapitalization," is a bet on the company's long-term profitability, he explained.
The deal also carries some risk. If trends in the PC business punish Dell, leaving it unable to afford the extra debt and in serious financial trouble, shares could lose even more value.
"As a shareholder, do you take Michael Dell's offer and take the money and run, given the (poor) expectations for the PC business; or do you take some cash now, continue to hold stock and hope the company can pay down that debt and grow in the future?" Mullane said.
Southeastern Asset Management, the investment firm that owns an 8.4 percent stake in Dell Inc., has demanded the names of other shareholders. That information could be used to rally opposition to the deal. Mutual fund manager T. Rowe Price, which owns a nearly 5 percent stake in Dell, also is lobbying against the deal.
Icahn's entry into the debate makes it even less likely that shareholders will accept Dell's current buyout offer, said James Kelleher, analyst with Argus Research, an independent equity research firm.
"This deal was between a rock and a hard place before — but they're really up against it now," Kelleher said. He said Dell may up his bid to satisfy shareholders, but it may not be possible to craft a viable deal that values shares at $15 or $16.
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