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Why Icahn’s and Southeastern’s rival bid for Dell may flop

Carl Icahn is at it again. In a letter to Dell’s board yesterday, the billionaire and Southeastern Asset Management, two of the flailing computer maker’s biggest shareholders, offered a counter bid to acquire the company. They’re challenging a management buyout led by founder Michael Dell with private equity firm Silver Lake, which the letter dubbed “the Great Giveaway.”  The Icahn-Southeastern offer isn’t a home run. It could actually be worse than the proposal it’s meant to trump. But it might just apply enough pressure on the company’s founder and Silver Lake to raise their offer and finally close the deal.

Dell and Icahn have been playing a protracted game of chicken since CEO Dell, Silver Lake and Microsoft offered to acquire the company in February. The group offered shareholders $13.65 a share, a price that irked some shareholders. Icahn and Southeastern are offering $12 a share in cash or additional stock, which would leave part of Dell publicly traded. They argue that stock would trade at more than $1.65 a share, which would make the bid higher than the Michael Dell offer.

But here’s why the offer may ultimately flop: that publicly traded stock is only attractive if the company appears to have good prospects—which Dell does not. In the first quarter of this year, PC sales had the biggest decline in a three-month period, falling by almost 14%, according to IDC data. Dell is expected to show further earnings decline when it reports first-quarter income on May 21. That’s not great for Silver Lake and Microsoft either, but it’s Michael Dell who assumes most of the risk in their deal structure.

Icahn had previously offered $15 a share in cash for 58% of Dell, while Southeastern has said Dell is worth $24 a share. The latest proposal isn’t nearly as enticing, but it comes alongside a threat by Icahn and Southeastern to campaign to remove Dell’s board and pummel the company with litigation if the Michael Dell-led deal wins out.

To make Southeastern and especially Icahn go away, the Michael Dell group will likely have to bump its bid. Investors seem to be hoping for that: Dell’s shares were up by 1.1% on the Icahn-Southeastern news. But the stock is only at $13.45, still below the original offer price.

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