Dell's largest independent shareholder unhappy with buyout terms

Dell Inc's largest independent shareholder, Southeastern Asset Management Inc, has told the computer maker that a $24.4 billion buyout bid undervalues it, adding to a chorus of investor dissatisfaction with the landmark deal to take it private, two sources close to the situation said.

Southeastern has privately told the company that it is "disturbed" by a $13.65 per share offer for the third-largest PC maker by a consortium led by founder and CEO Michael Dell, and instead believes Dell is worth $20 per share, the sources said on Thursday.

The Memphis, Tennessee-based fund, which owns a 7.5 percent stake in Dell, did not return calls seeking comment.

Southeastern has not commented publicly since the deal was announced on Tuesday, but Chief Executive Mason Hawkins said in a September 30 filing that the fund believed the company's shares were worth in the "low 20s" even if Dell's personal computing business was valued at nothing.

A representative for the buyout consortium, which also includes private equity firm Silver Lake Partners and Microsoft Corp, declined to comment. Dell was not available for comment.

The sources said the buyout consortium has no plans to raise its current bid. The buyers are counting on the shareholders eventually realizing that no better options exist for Dell than their current offer, they said.

Southeastern's reservations could create new uncertainty about the deal. Over the past few days, some other Dell shareholders have indicated they will vote against the deal.

Further complicating the largest leveraged buyout since the financial crisis is the influx into Dell shares in recent weeks by event-driven funds and risk arbitrage investors. Such investors now own roughly 20 percent of company, according to investor estimates, and could bet on a higher offer.

"Let the fools sell low - don't make us all fools," said Nick Tompras, president of Alpine Capital Research in St Louis. Tompras said his firm would vote its 2 million Dell shares against the deal.

Schneider Capital Management in Wayne, Pennsylvania, which owned almost 350,000 Dell shares at the end of September, will also vote against the deal, President Arnie Schneider said.

Southeastern stands to be among the biggest losers if the deal is completed at the current price.

Sanford Bernstein analyst Toni Sacconaghi estimated Southeastern paid an average of more $20 a share for its stake, meaning a loss of at least $825 million at the current $13.65 offer price.

Hawkins, a 40-year veteran of the money management business who has agitated against companies in the past, could take his objections public.

Last year, Hawkins applauded the board of embattled gas producer Chesapeake Energy Corp for stripping CEO Aubrey McClendon of his title as chairman after revelations by Reuters that McClendon's personal dealings might be in conflict with the company's interests.

A few days later, Hawkins sent a letter urging the board to consider selling the company in the wake of a stock plunge caused by the reports. McClendon resigned this year.

Hawkins also agitated against troubled Japanese medical device company Olympus Corp in 2011, after disclosures of a massive accounting scandal, eventually calling for key members of the company's board to resign or be replaced.

Lack of options
Dell has agreed to a 45-day "go shop" period, during which it would look for an alternative deal, but the sources said they did not expect an alternative buyer to emerge.

Meanwhile, the buyout consortium is hoping that investors will realize they do not have any other options when they see the regulatory filing detailing the actions Dell took before arriving at the current deal, the sources said. That filing is expected in mid-March.

Before arriving at the deal, Dell considered various options, which included remaining a stand-alone company, separating its PC business, a leveraged recapitalization or restructuring its assets, one of the sources said.

But it realized that these options would not work, the source said.

Dell was regarded as a model of innovation as recently as the early 2000s, pioneering online ordering of custom-configured PCs and working closely with Asian component suppliers and manufacturers to assure rock-bottom production costs. But it missed the big industry shift to tablet computers, smartphones and high-powered consumer electronics such as music players and gaming consoles.

As of 2012's fourth quarter, Dell's share of the global PC market had slipped to just above 10 percent from 12.5 percent a year earlier as its shipments dived 20 percent, according to research house IDC.

The company's problems made the option to remain independent unattractive, the source said. A leveraged recap taking on excess debt to pursue a large share repurchase or pay out a dividend would have been a risky proposition, the sources said.

The large number of shares in the hands of index funds also complicates the task of critics. Passively managed funds owned about 292 million, or 17 percent, of Dell shares, according to Thomson Reuters data. Excluding Michael Dell's stake, that represents over 20 percent of the vote.

Opponents of the deal would have to muster a majority vote, excluding Michael Dell's stake, to shoot down the deal.

While index funds typically have policies that they will only vote in favor of mergers that maximize shareholder value, in practice they tend to vote yes.

© Thomson Reuters 2013