What Dell tells us about the entrepreneur's endless fight
What is it about the barrier between public markets and private companies? Traversing it in either direction seems fraught with peril. Facebook, Zynga, Groupon, and others saw their fortunes take a turn for the worse once they became public. And Dell is now undergoing a battle to take the company private again.
Entrepreneurs are used to fighting for the companies they are building, and Michael Dell's recent experience shows that in many respects that fight is never really over. To recap: After announcing a leveraged buyout intended to take Dell private and retool the company for a long-term recovery (free from those vexing quarterly performance targets), Michael Dell faced a counter-bid from longtime activist investor Carl Icahn.
Icahn appealed to investors who feared Dell's buyout plan would shortchange them. He offered a $12 a share “stub” dividend and a future Dell where its founder had no role. Dell countered with a detailed presentation arguing that Icahn's plan fell $3.9 billion short of the money needed to pay the stub dividend. Icahn shot back with a list of CEOs who could be his successor (including Oracle's Mark Hurd, who said he wasn't interested), but didn't challenge the math.
That presentation may have been the turning point for Michael Dell. It's worth a look, because you may never again see a company so ruthlessly trash its own business in public. The company finally admitted the bleak realities of a PC-dependent giant that bears have been pointing to for years. But the gambit may have helped Dell, since Icahn appears not to be having much luck in lining up the money he needs for his plan.
This morning, the New York Post reported that Icahn and his partner, Southeastern Asset Management, have been having trouble arranging the $5.2 billion needed to pay the $12 a share dividend that is the heart of their plan. To fill the $3.9 billion funding gap, Icahn needs more time. The bleak picture Dell painted in its presentation seems to be daunting for some prospective lenders.
Later in the day, CNBC reported that bankers and bondholders Icahn had been talking to say the chances are increasing Icahn will bow out of his pursuit of Dell. “The prospect of a need for another $2 billion worth of equity for a recap is giving Icahn pause as he reviews the horrendous operating numbers that Dell recently reported,” CNBC's David Farber said.
Time is running out for Icahn. Dell's plan will face shareholders on July 18. Before then, Icahn needs to win the support of Institutional Shareholder Services, a proxy advisory firm whose recommendations on these kinds of boardroom battles is so influential it can be a make-or-break opinion. Without a new financing plan in place, ISS isn't likely to weigh in on Icahn's side.
Sadly, for Michael Dell, his problems won't be over even if Icahn goes away. The battle only inflamed the concerns of many longtime Dell shareholders that the buyout deal may not be the best deal for them. While the scrutiny and high-profile nature of Dell's plan pressures the company to be fair in its valuations, there is just an inherent conflict of interest when a company buys itself out and uses its own numbers to calculate the price.
That conflict was heightened in another report this week about another company that tried to take itself private – Revlon. Yesterday, the SEC settled charges that Revlon's directors deceived shareholders during a failed 2009 deal. Notably, an SEC official in its enforcement division had these harsh words: “Going-private transactions create opportunities for shareholder abuse and can have coercive effects on minority shareholders.” Those words may be ringing in the ears of Dell shareholders as the privatization vote draws near.
The problems faced by Dell's board today may seem miles away from the concerns of many startups. But there is a lesson in here for all founders. As long as the company you've built is worth fighting for, you're probably going to have to fight for it. You may be building the company of your dreams, but even when those dreams come true you might one day find them haunted by a ghoulish activist investor.