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Icahn Now Dell’s Largest Outside Stockholder

The activist shareholder got his new ownership position by buying half of Southeastern Asset Management’s holdings in Dell

Last Friday calm seemed to be descending on Round Rock, Texas.

Reports were circulating that activist shareholder Carl Icahn was losing the stomach for scuttling the Michael Dell-Silver Lake Management plan to buy the company for $24.4 billion and take it private.

It was said he was disheartened by Dell financials and having trouble getting financing for his plan to “recapitalize” Dell.

On Tuesday Icahn bounced back like a rubber ball as Dell’s largest stockholder next to founder Michael Dell armed with a new and different demand for the company to launch a $16 billion tender offer for about 1.1 billion of Dell’s 1.76 billion shares outstanding.

Icahn got his new ownership position by buying half of Southeastern Asset Management’s holdings in Dell. Adding that to what he already had gives him about 152 million shares or ~8.7 % of the company.

He also claimed to have gotten backing worth up to $1.6 billion for his new scheme from a “major investment bank” that CNBC quickly identified as Jefferies as well as an idea where he can get the rest.

Southeastern released a statement saying it’s still going to vote against the Dell “go private” proposal and in favor of Icahn’s slate of replacement directors for the Dell board, who on election would then make the $16 billion tender offer.

No mention was make of how much Icahn might have paid for the Southeastern shares. It was understood that Southeastern bought its position at the wrong time and will be underwater if the $13.65-a-share “go public” offer is approved at Dell’s special stockholder meeting on July 18.

Icahn’s new tender offer scheme would leave a “stub” of the company public. Stockholders who want to liquidate – well presumably most of them – would get $14 a share, 35 cents a share more than Michael’s offer. Icahn and Southeastern won’t tender their shares.

Like Icahn’s previous $12-a-share in cash or stock scheme, Dell will have to add more debt to pay off the stockholders. Icahn figures it would take $5.2 billion in debt financing, $7.5 billion in cash from Dell’s treasury and $2.9 billion through a sale of receivables, leaving roughly $4.9 billion of cash for the company to operate on.

If Jefferies kicks in $1.6 billion and Icahn provides (if he has to) $2 billion, then that leaves another $1.6 billion in financing for him to still round up.

In an open letter to Dell stockholders Tuesday Icahn wrote, “To pre-empt the repetition of the criticisms the company made regarding our prior plan, we believe the company will have ample liquidity and capital to make the tender offer and run the business well.”

The special committee of Dell’s board charged with resolved the company’s future decided Icahn previous plans were dicey and that the safer “go private” scheme shifts “very substantial risks to the buying group.”

After the close of business Tuesday the committee released a statement saying it was reviewing Icahn’s “latest concept” but that it “is not, in its present state, a transaction that the Special Committee could endorse and execute – there is neither financing, nor any commitment from any party to participate, nor any remedy for the company and its shareholders if the transaction is not consummated. In addition, the concept does not adequately address the liquidity issues and other risks the Committee previously highlighted.”

It went on to say that “More than a month ago, the Committee requested financial and other information from Mr. Icahn and Southeastern in connection with their previous recapitalization idea. Those requests remain outstanding and are equally relevant to this latest concept. The Committee will consider any and all such information provided by Mr. Icahn. However, in the absence of an actionable proposal that would create more value for shareholders, the Special Committee continues to recommend the pending, fully financed $13.65-per-share cash sale transaction.”

Here is a copy of Icahn’s open letter Tuesday that the special committee is reacting to:

Dear Fellow Dell Shareholders:

We take this opportunity to respond to rumors regarding the availability of financing for our proposal for a recapitalization at Dell and to address recent statements by Dell that demean the prospects of Dell. We are amazed by these statements by the Dell Board. In what other context would the person tasked with selling a product actually spend their efforts negatively positioning the very product they are trying to sell? Is that how the supposed “go-shop” was conducted? Can you imagine a real estate broker running advertisements warning of termite danger in a house each time a prospective buyer seems interested? Dell’s statements, and in particular the June 5 presentation by Dell, only convinces us further that the $13.65 price in the pending Michael Dell/Silver Lake deal significantly undervalues the Company. We have also come to the conclusion that a Board that has circulated this information while we were attempting to proceed with our proposed recapitalization (which would allow Dell stockholders the opportunity to retain their Dell shares and to elect to receive a distribution of either $12.00 per share in cash, or $12.00 in additional shares of Dell common stock valued at $1.65 per share), will never accept our proposal as a Superior Proposal as defined in Dell’s February 5 Merger Agreement. As a result, and in order to settle all questions regarding liquidity, we propose that Dell engage in the $14 per share tender offer described below. In order to implement our tender offer proposal we will: (1) seek to defeat the Michael Dell/Silver Lake transaction at the July 18 Special Meeting and we ask you to vote against that transaction as we believe the $13.65 per share purchase price substantially undervalues Dell; and (2) once the Michael Dell/Silver lake transaction is defeated, seek to elect our slate of directors at the 2013 Dell annual meeting of shareholders to implement our proposed $14 per share tender offer.

We propose that Dell commence a tender offer for approximately 1.1 billion Dell shares at $14 per share (for a maximum of $16 billion available in the tender offer). Icahn and Southeastern (who together hold approximately 13% of Dell’s shares) will agree not to tender in the tender offer. Our proposal allows those who believe, like us, that the $13.65 price being offered in the Michael Dell/Silver Lake going private transaction significantly undervalues Dell, to continue to hold Dell shares. It also provides an opportunity for those who wish to tender at $14 a share to do so, with the knowledge that they will be able to sell at least approximately 72% of their position, and possibly more if other shareholders do not fully subscribe to the tender offer.

Funding for the tender offer would be provided from $5.2 billion of debt financing, together with $7.5 billion in cash available at Dell (after taxes and payment of fees) and $2.9 billion available through a sale of Dell receivables. This would leave approximately $4.9 billion of cash available for ongoing Dell operations.

We are proceeding to obtain commitments for $5.2 billion of senior debt financing to be made available to Dell as a bridge loan to guaranty the tender offer and believe that we are on target to achieve that result. A major investment bank has indicated its willingness to make available $1.6 billion and Carl Icahn and his affiliates would make available $2 billion if necessary to facilitate this commitment. To preempt the repetition of the criticisms the Company made regarding our prior plan, we believe the Company will have ample liquidity and capital to make the tender offer and run the business well. The Company’s criticism that we must plan to prepay debt is wrong. Just as most companies do, we believe the Company can pay down debt as it comes due from cash from operations. And since the Company will have $4.9 billion in cash following the tender offer, we see no need to arrange a revolver at this time.

While we have not varied one inch from our plan to raise $5.2 billion in senior debt and to utilize cash and receivables at Dell to fund our recapitalization proposal, Dell has continued to move the goal posts by implying that more cash is required for our proposal to be implemented. The special committee also seems to gloss over the fact Dell’s business generates significant cash flow according to management’s and BCG’s publicly filed plans which have not been changed. It appears to us that the only clear shortfalls at Dell are from poor execution which interestingly occurred during the first half of the year (including starting a PC price war a mere two months before a going-private transaction, granting retention cash bonuses to employees and prepaying debt) and negotiating a high breakup fee in the Michael Dell/Silver Lake deal. We also find it strange that when Quest was purchased in July 2012 it was making $100 million in operating income and now it is suddenly losing $85 million.

We are also announcing today that we have purchased approximately 72 million shares of Dell from Southeastern Asset Management, with proxies to vote at the July 18 Special Meeting. Southeastern continues to be part of our group in opposing the Michael Dell/Silver Lake deal and will share the fees and expenses of the proxy fight on a pro rata basis.

Finally, we have reviewed motions filed against Dell by plaintiffs in their action challenging the Michael Dell/Silver Lake transaction alleging, among other things, inadequacy of the $13.65 per share purchase price, conflicts of interest and breach of fiduciary duty. We have provided the attached letter in support of that action.

We continue to urge Dell shareholders to vote against the proposed Michael Dell/Silver Lake going private transaction at the July 18 Special Meeting.

Very truly yours,

Carl C. Icahn

More Stories By Maureen O'Gara

Maureen O'Gara the most read technology reporter for the past 20 years, is the Cloud Computing and Virtualization News Desk editor of SYS-CON Media. She is the publisher of famous "Billygrams" and the editor-in-chief of "Client/Server News" for more than a decade. One of the most respected technology reporters in the business, Maureen can be reached by email at maureen(at) or paperboy(at), and by phone at 516 759-7025. Twitter: @MaureenOGara

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