Flawed Dell compromise saves faces all round

August 2, 2013

By Robert Cyran

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

A flawed compromise on the buyout of Dell will save faces all round. Letting the $24 billion transaction fade away would have hurt most shareholders, the board and the company’s eponymous founder. A 2 percent hike in the offer price by buyers Michael Dell and Silver Lake Partners in return for a tweaked voting procedure won’t delight anyone – but it should seal the deal.

Rather than going to a vote on Friday that risked killing the deal, almost everyone had reasons to compromise. Selling shareholders will get up to $450 million more, votes that aren’t cast won’t count against the deal, and a changed record date will mean a different mix of owners when ballots are counted on Sept. 12. These shifts ought to ensure Dell goes private as planned.

Investors don’t have much choice. The company is in worse shape now than it was when the founder’s $13.65-a-share bid emerged in February. The PC market is shrinking at a 15 percent annual rate, faster than thought six months ago. Dell’s stock would surely fall precipitously if the deal falls through.

The flaky alternative proposed by activist Carl Icahn – more debt, a big dividend and a stub of equity that’s supposed to more than make up the difference in value – looks risky. Icahn won’t like the new deal, but at least he and other arbitrageurs stand to make a slim profit. Long-term owners such as Southeastern Asset Management who loudly proclaimed the stock was worth close to twice as much will have to admit that kind of valuation is unrealistic today.

Dell’s board also had few options. Directors changed the voting procedure in exchange for a relatively small bump in price and a concession on breakup fees. That’s better than recommending a deal investors don’t accept, and then seeing them suffer losses.

For his part, Michael Dell’s credibility would have suffered had the vote gone against him. Having kicked in a bit more cash to push the purchase across the line, he’ll have more autonomy to turn the company around – even assuming he would have been allowed to remain as chief executive with a different outcome.

There’s even a bright spot for Silver Lake. The private equity shop is buying a company whose prospects are looking less promising by the day. But the firm will avoid the reputational damage that might have occurred had it walked away. There may be grumbles on all sides – but the alternative would have been worse.

This item’s reference to Southeastern’s valuation of Dell in the fourth paragraph has been corrected.

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