The best laid plans of mice and Michael Dell
Reading about how complex the Dell situation has become this week, I keep hearing that refrain from The Streets in my head: It was supposed to be so easy.
Two months ago today, Michael Dell embarked on a plan that was as simple in idea as it was ambitious in scope. Dell's stock price had fallen so low – to below $9 a share late last year from a high of $41 a share in 2005 – so why not buy back shares, take the company private and rebuild it according to Dell's vision? Michael Dell put in his own money and raised more through Silver Lake Management to cobble together a bid worth $24.4 billion.
With a leveraged buyout, Dell had a chance to do what few founders can pull off: return the company that bore his name to greatness, pulling it out of the hospice ward where big bloated tech companies go to die, and giving it a second act as a cloud-based IT services company. It seemed unlikely but it was a ballsy gambit, and I was among those rooting for him to pull it off.
It didn't take long for the plan to start spinning out of control. Dell's offer to pay shareholders $13.65 a share may have seemed like a generous premium at first glance, but many investors grumbled the price was too cheap. Among investors agitating for a better price if not a different bidder entirely was Carl Icahn, activist investor at large. Icahn's first salvo was an SEC filing demanding that Dell borrow $8.25 billion to help finance a special dividend of $9 a share.
Dell responded by conducting what it termed a "robust 'go-shop'" process to see if any third parties would make a better bid, inviting Icahn to participate in that process. Icahn tipped his trump card: “years of litigation” that would weigh down the already formidable costs of taking Dell private – a grim threat that could easily make a $9 special dividend look cheap in retrospect.
The consortium favoring a Dell leveraged buyout stood its ground, not offering shareholders more money. Then another bidder emerged, Blackstone – a private-equity giant with $4 billion in revenue last year. If that wasn't bad enough, two chief Dell rivals – Hewlett-Packard and Lenovo – got a chance to study Dell's books as part of the “go-shop” process, even though neither of them seemed serious about making a bid.
Blackstone later emerged with a bid to pay $14.25 a share to Dell shareholders willing to part with their stakes, and Icahn prepared his own bid before signaling he was willing to join Blackstone's. But for Michael Dell, the stakes were only getting higher. Blackstone's bid didn't require Dell's 16% stake in the company. In fact, he might not even stay on as CEO.
That raised the prospect of Blackstone keeping Dell a publicly traded company but essentially stripping down and selling off the bits and pieces that make up Dell, including a patent portfolio that many tech giants would covert in the age of the patent troll.
Michael Dell countered with a pitch that Dell is better off fixing its problems as a private concern, given that profit and revenue are on track to decline if the company remains on its current path. He also laid out his plan to employees – including ramping up in emerging markets, hiring more sales and investing in tablets and PCs – perhaps hoping to stave off an exodus of talent.
Things could come to a head as early as next week. Blackstone and Michael Dell are talking about what his future role could be with the company. A Bloomberg report Friday suggested he could be sidelined, while one from Reuters suggested there may be a desk in the CEO suite for him after all. Either way, a Blackstone deal is looking more likely than the Dell's dream of taking his company private.
As usually happens whenever things get complicated and messy on Wall Street, the most likely winners will be the firms advising the different sides in the Dell talks – an estimated $400 million in advisory fees to make happen a deal valued at $24.4 billion.
It wasn't supposed to be like this. Michael Dell was supposed to walk away with control over his baby again, remaking it into something new. It was supposed to be so easy. But the messy fight over who will control Dell is only going to make the actual task of turning Dell around that much harder. Regardless of who wins this epic Wall Street battle, the loser is likely to be Dell itself.