Breakingviews-Dell blow-by-blow makes rival bidders' jobs harder

Mon Apr 1, 2013 8:18pm IST

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(The authors are Reuters Breakingviews columnists. The opinions expressed are their own.)

By Robert Cyran and Richard Beales

NEW YORK, April 1 (Reuters Breakingviews) - A bidding war for Dell DELL.O just became even less likely. The computer company on Friday laid out, in a novel-length filing, its reasoning for agreeing to a $24.4 billion buyout by founder Michael Dell and private equity firm Silver Lake Partners. It's only the company's version, but Dell seemingly did what it could to secure the best offer available.

The 275-page document details the who, what, when, where and why of the deal as it unfolded. The account essentially begins in June 2012, when Dell shareholder Southeastern Asset Management contacted Michael Dell to discuss going private. By this account, that set in motion the process that resulted in the proposed buyout, with the twist that Silver Lake ended up as the founder's backer with Southeastern squeezed out – and now a critic of the deal.

In reality the story has older roots. Michael Dell was asked in 2010 if he had ever thought about taking the company private, and he said "yes." Such narrative niggles aside, Dell's board appears to have done the right things after learning officially of the founder's interest in a buyout last August. It established a special committee, hired advisers, and excluded the founder from meetings. It also tried to gin up rival interest, and it pushed the Michael Dell-Silver Lake offer from an early conditional minimum of $11.22 a share up to a committed $13.65.

Even after the board agreed to the buyout, 67 possible buyers were contacted during the "go shop" period, with adviser Evercore (EVR.N) incentivized to the tune of $30 million to find a superior bid. And in the meantime the board, with help from outside consultants, became less bullish on Dell's likely financial performance, according to projections laid out in Friday's filing.

The board's preference for a buyout over simply borrowing more and paying shareholders a big dividend also appears sound. Directors felt that taking on additional debt could be risky, and there are other drawbacks. Nearly all the company's share buybacks over the past two years have cost more than the agreed $13.65 per share sale price. While that suggests the board once thought the company was worth more, it also shows how efforts to signal a public market valuation can fail.

Investors are still stuck with the fact that Michael Dell owns over 15 percent of the company and he can choose whether to roll his equity into any other bid. However above-board the bid process – and however many expensive advisers the board hired – that makes him the kingmaker. Still, the board handled the inevitable conflicts appropriately. That means the job of potential rival bidders Blackstone (BX.N) and Carl Icahn is now harder.

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CONTEXT NEWS

- Dell on March 29 filed a proxy statement for the $24.4 billion agreed buyout by founder Michael Dell and private equity firm Silver Lake Partners. In the statement, the company’s board ticked through the history of the negotiations leading to the deal and the reasons the board preferred the founder's offer over rival ones, and warned that it would be risky for the PC maker to borrow heavily to buy back shares while remaining public. The Silver Lake-backed group has offered $13.65 a share to take Dell private.

- Dell said on March 25 it had received alternative proposals from Blackstone and Carl Icahn that could turn out to be superior to the offer from Michael Dell and Silver Lake. Icahn, who proposed paying $15 a share for 58 percent of Dell, also said he had started preliminary talks with Blackstone.

- Proxy: link.reuters.com/han96t

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- For previous columns, Reuters customers can click on [CYRAN/] and [BEALES/]

(Editing by Richard Beales and Martin Langfield)

((robert.cyran@thomsonreuters.com; richard.beales@thomsonreuters.com)(Reuters messaging robert.cyran.thomsonreuters.com@reuters.net; richard.beales.thomsonreuters.com@reuters.net)) Keywords: BREAKINGVIEWS DELL/

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