The special committee of Dell’s board announced that the rival preliminary acquisition proposals it received from private equity firm Blackstone and activist investor Carl Icahn could reasonably lead to better offers, meaning the parties will now enter into negotiations. This isn’t a surprise. But there is still a long way to go before the board can declare their offers, both of which have some issues, superior to the buyout scheme involving founder and CEO Michael Dell.
It is rare that a “go shop” period—when a seller such as Dell can solicit offers from other buyers—actually produces alternative proposals. That period kicked off after Michael Dell, private equity firm Silver Lake, and Microsoft agreed to acquire Dell in a $24.4 billion go-private deal in February.
Dell’s board was sensitive to an appearance of conflict of interest because the deal involves the company’s CEO and largest shareholder. Therefore, Dell’s special committee was almost sure to enter into talks with Blackstone and Icahn to show it is thoroughly evaluating all options for shareholders. The board is especially under pressure because large outside shareholders Southeastern Asset Management, T. Rowe Price and Icahn are opposed to the $13.65 per share offer of the Michael Dell group, which has an opportunity as part of the process to propose one topping offer.
But that doesn’t mean his offer is in serious trouble, at least not yet. Icahn’s offer is especially questionable and is probably meant to pressure other suitors to increase theirs, or to get Dell to offer a special dividend. Icahn has offered to put in his own money to help finance a deal to acquire 58% of Dell for $15 per share, which would amount to about $15 billion, according to sources. He has a letter from boutique bank Jefferies & Co. saying it is highly confident it can offer financing, but it’s not a commitment letter, according to sources. And Jefferies is not known as a major financing bank and is unlikely able to provide enough money on its own.
In fact, most of the big financing banks are already committed to Dell’s original deal with Michael Dell. As a result, Blackstone (which is offering more than $14.25 per share) has a similar “highly confident” letter from Morgan Stanley, but it’s also not a financing commitment, according to sources. Although Morgan Stanley has more capacity than Jefferies to finance such a deal, Blackstone would still need other banks to help raise enough money. The Michael Dell group has five banks involved in its financing.
And instead of partnering with big names like TPG, which declined to be a part of the offer, Blackstone has teamed up with lesser-known firms Francisco Partners and Insight Venture Partners, according to sources. Those factors make Blackstone’s tentative offer very unBlackstone-like, since the largest private equity firm in terms of assets usually shows up to win. It’s unclear from Blackstone’s current proposal whether it can ultimately sway Dell’s board and shows it needs more time to solidify its offer.
Both Icahn and Blackstone leave a stock component to Dell’s ownership structure, allowing for other shareholders like Southeastern Asset Management to participate in a deal, sources said. But such “public stubs” haven’t always panned out. Witness the Clear Channel buyout from 2007 in which the stock component of the deal has dropped in value.
Last, Michael Dell, the largest shareholder, has to work with other possible suitors but he doesn’t have to roll over his shares in other offers. All these hurdles mean that even though Blackstone and Icahn have offered to pay more per share for Dell, their proposals have serious handicaps that make their winning far from certain.