Last updated: August 2, 2013 6:15 pm

Last-ditch compromise revives Dell buyout prospects

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The prospects for Michael Dell’s buyout of the PC company he founded rose dramatically on Friday as a special committee of Dell’s board agreed to a last-minute deal that adds less than two per cent to the purchase price.

The breakthrough looked set to remove the biggest roadblock to Mr Dell’s ambitions, but drew angry responses from dissident investors who claimed the board was showing favouritism. Dell’s shares rose by more than 5 per cent to $13.65, their highest level in more than three months

Details of the new compromise came less than 30 minutes before a shareholder meeting that was expected to have seen investors reject the buyout, ending Mr Dell’s hopes of regaining majority control of the company that he first took public 25 years ago.

Under the new terms, the offer price has been sweetened by 10 cents to $13.75 per share and the deal also now includes a special dividend of 13 cents. In exchange, Dell has agreed to a change in its shareholder voting rules requested last week by Mr Dell and buyout partner Silver Lake, swinging the likely outcome of a vote on the buyout heavily in their favour.

Mr Dell will personally pay the dividend, adding $230m to his costs for the deal, according to a person familiar with the terms. The concession marks the second time he has agreed to pay more for Dell without a similar raise from Silver Lake, following a $170m sweetener he added in January.

In a sign that the concession to Mr Dell was likely to be challenged in court, Carl Icahn, the activist investor who has opposed the buyout, immediately tweeted that “the war is far from over.” He launched a legal action earlier this week to prevent the company changing the deal process in a way that would help Mr Dell.

The increase in the offer amounted to “paying shareholders with their own money”, since the extra cash was roughly equal to the earnings Dell would make in the two months that the deal has now been delayed, said Richard Pzena, one shareholder opponent. He claimed that it was “unethical, if not illegal” for the board to change its rules in Mr Dell’s favour for so little.

Dell’s special committee had earlier turned down Mr Dell’s request for a change in the company’s voting rules in return for only a 10 cent increase.

The rules governing how votes are counted had become a major obstacle to the $24bn deal. With Mr Dell unable to vote his own 15.6 per cent stake, the buyout bid would fail if 43 per cent of Dell’s shareholders either voted against it or failed to vote.

Some 23 per cent of Dell’s shares were not voted ahead of an earlier shareholder meeting, according to two people familiar with the situation, in effect boosting the “no” votes by that amount and leaving the buyout facing defeat if only 20 per cent of shareholders actively opposed it.

On Friday, Dell said it had now agreed to the buyout group’s request to require only a majority of voting shareholders to approve their offer, rather than a majority of all shareholders, thus reducing the impact of non-voting investors.

Justifying the concession, Alex Mandl, the chairman of the special committee, said that the original voting rules had been set before an alternative proposal emerged from Mr Icahn for a leveraged buyout of the company, and that the changed circumstances justified the amendment.

That explanation was rejected by Mr Pzena, who said that shareholders were still being presented with the same choice of whether to back the buyout or not and were not getting a chance to express a view on Mr Icahn’s alternative plan.

“We believe modifying the voting standard is in the best interests of Dell shareholders, both because it has enabled us to secure substantial additional value and because it provides a level playing field for the decision facing shareholders,” Mr Mandl said.

Dell postponed the shareholder vote on the deal for a third time on Friday and reset the date for 12 September. It also moved the cut-off date for new shareholders to vote on the deal from 3 June to 13 August, allowing arbitrage traders who bought shares late in the negotiations to have a say in the outcome and adding further to the chances of approval.

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