When we first wrote about Dell - Michael Dell that is - stepping in to drive a leveraged buyout of Dell the company, we not only anticipated shareholder grumblings about the deal, but fully expected it to become a major issue. This has in fact become the reality for Michael Dell and his leveraged buyout compadres, though our own expectation has been that Dell and his team would eventually need to simply sweeten the buyout price to something like $17 a share.

Southeastern Asset Management - Dell's largest independent shareholder was the first to jump in, with an analysis pegging Dell to be worth around $24 a share. The company also suggested as an alternative to a leveraged buyout a leveraged recapitalization as a solution instead - where Dell would use a combination of existing cash, anticipated earnings and possibly some new debt to pay out a substantial dividend in order to unlock value for investors.

Dell's board claims to have investigated the leveraged recapitalization option and stated that it believes its buyout offer is the better way to go. That is certainly true in the case of allowing Michael Dell to retain ownership of a private Dell. Whether or not it’s the best move for shareholders is an entirely different story, and our sense of it today is that the leveraged buyout has moved a step closer to falling apart. Why?

Because the United States' real world Gordon Gekko - good ol' billionaire and greenmailer…whoops, we mean activist investor…Carl Icahn - has now stepped into the picture. His company has apparently amassed a substantial (CNBC claims it is six percent) share of Dell and Icahn's team has developed an analysis that places the value of Dell shares at $22.81 per share. Icahn only plays hardball and he has an army of lawyers in place ready to keep Dell in litigation forever if Dell and his team do not come around to face to face (so to speak) negotiations that will satisfy Icahn.

Icahn's Dell Strategy

Icahn made his new role known through a letter to the Dell board, which Dell has released and which we've provided in full at the end of our article. It is full of the usual Icahn hardball tactics - threats of a proxy fight, calling special shareholder meetings, nominating new slates of directors, and so on that you would expect. 

Icahn's proposal calls for a $9 special dividend per share that, based on a share price of $13.81 per share, would deliver on the $22.81 share value Icahn's analysis claims Dell is worth. The letter requests that Dell "promise" it will pay out the $9 per share special dividend if the shareholder vote on Michael Dell's buyout offer fails. Clearly Icahn doesn't believe the vote will fall in favor of the original buyout deal.

Further, the letter states that if the Dell board does not make the "promise" to make the $9 dividend payout if shareholders vote the deal down, then Icahn demands that the board must combine the shareholder vote with the annual general meeting that will take place in June or July. This is where the proxy fight would come into play - Icahn will nominate his own slate of directors who, if elected, would then offer shareholders the option of taking the buyout deal or the $9 per share special dividend.This provides shareholders, Icahn believes, with a real choice between the buyout and Icahn's dividend proposal. He further adds in his letter:

"To assure shareholders of the availability of sufficient funds for the prompt payment of the dividend, if our slate of directors is elected, Icahn Enterprises would provide a $2 billion bridge loan and I would personally provide a $3.25 billion bridge loan to Dell, each on commercially reasonable terms, if that bridge financing is necessary."

We certainly don't see a scenario where Southeastern Asset Management and other major investors would object to this strategy. Interestingly, according to the Wall Street Journal, "Southeastern accused Dell of withholding information from investors in an effort to take the company private…" Dell's board and Michael Dell are looking less and less wholesome to us.

Dell's strategies as CEO over the last several years have certainly earned him nothing - his recent term as CEO has entirely failed the shareholders. We believe the leveraged buyout essentially screws all investors and we don't believe Michael Dell should be able to walk away with owning a private Dell for, as we've noted elsewhere "a song and a dance" as a reward for failed leadership.

There has also been other news on Dell, in particular that Hewlett-Packard, Lenovo and private equity company Blackstone Group had all looked at offering their own M&A deals, but this is all just noise - none of them are players in this game.

That said we're rooting for Icahn in this fight.

Icahn's Full Letter to the Dell Board

Icahn Enterprises L.P.
March 5, 2013
Board of Directors
Dell Inc.
One Dell Way
Round Rock, Texas 78682
Attn.: Laurence P. Tu
Senior Vice President, General Counsel and Secretary
Re: Agreement and Plan of Merger, dated as of February 5, 2013
(the “Going Private Transaction”).

Dear Board Members:

We are substantial holders of Dell Inc. shares. Having reviewed the Going Private Transaction, we believe that it is not in the best interests of Dell shareholders and substantially undervalues the company.

Rather than engage in the Going Private Transaction, we propose that Dell announce that in the event that the Going Private Transaction is voted down by shareholders, Dell will immediately declare and pay a special dividend of $9 per share comprised of proceeds from the following sources: (1) $4.26 per share, or $7.4 Billion, from available cash as proposed in the Going Private Transaction, (2) $1.73 per share, or $3 Billion, from factoring existing commercial and consumer receivables as proposed in the Going Private Transaction, and (3) $4.26, or $5.25 Billion in new debt.

We believe that such a transaction is superior to the Going Private Transaction because we value the proforma “stub” at $13.81 per share using a discounted cash flow valuation methodology based on a consensus of analyst forecasts. The “stub” value of $13.81 combined with our proposed $9.00 special dividend gives Dell shareholders a total value of $22.81 per share, representing a 67% premium to the $13.65 per share price proposed in the Going Private Transaction. We have spent a great deal of time and effort in determining the $22.81 per share value and would be pleased to meet with you to share our analysis and to understand why you disagree, if you do.

We hope that this Board will agree to adopt our proposal by publicly announcing that the Board is committed to implement our proposal if the Going Private Transaction is voted down by Dell shareholders. This would avoid a proxy fight.

However, if this Board will not promise to implement our proposal in the event that the Dell shareholders vote down the Going Private Transaction, then we request that the Board announce that it will combine the vote on the Going Private Transaction with an annual meeting to elect a new board of directors. We then intend to run a slate of directors that, if elected, will implement our proposal for a leveraged recapitalization and $9 per share dividend at Dell, as set forth above. In that way shareholders will have a real choice between the Going Private Transaction and our proposal. To assure shareholders of the availability of sufficient funds for the prompt payment of the dividend, if our slate of directors is elected, Icahn Enterprises would provide a $2 billion bridge loan and I would personally provide a $3.25 billion bridge loan to Dell, each on commercially reasonable terms, if that bridge financing is necessary.

Like the “go shop” period provided in the Going Private Transaction, your fiduciary duties as directors require you to call the annual meeting as contemplated above in order to provide shareholders with a true alternative to the Going Private Transaction. As you know, last year’s annual meeting was held on July 13, 2012 (and indeed for the past 20 years Dell’s annual meetings have been held in this time frame) and so it would be appropriate to hold the 2013 annual meeting together with the meeting for the Going Private Transaction, which you have disclosed will be held in June or early July.

If you fail to agree promptly to combine the vote on the Going Private Transaction with the vote on the annual meeting, we anticipate years of litigation will follow challenging the transaction and the actions of those directors that participated in it. The Going Private Transaction is a related party transaction with the largest shareholder of the company and advantaging existing management as well, and as such it will be subject to intense judicial review and potential challenges by shareholders and strike suitors. But you have the opportunity to avoid this situation by following the fair and reasonable path set forth in this letter.

Our proposal provides Dell shareholders with substantial cash of $9 per share and the ability to continue as owners of Dell, a stock that we expect to be worth approximately $13.81 per share following the dividend. We believe, as apparently does Michael Dell and his partner Silver Lake, that the future of Dell is bright. We see no reason that the future value of Dell should not accrue to ALL the existing Dell shareholders — not just Michael Dell.

As mentioned in today’s phone call, we look forward to hearing from you tomorrow to discuss this matter without the need for us to bring this to the public arena.

Very truly yours,
Icahn Enterprises L.P.
By: Carl C. Icahn
Chairman of the Board