Michael Dell's LBO Faces Higher Obstacles

Founder and CEO Michael Dell’s bid to take his company, Dell Inc., private is facing higher obstacles as the July 18 shareholder vote looms and opponents, led by advocate investor Carl Icahn, gain strength.

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Dell founder and CEO Michael Dell delivers his keynote address at Oracle Open World in San FranciscoOn the eve of Independence Day, Michael Dell is looking at a much harder fight to break free of Wall Street through a leveraged buyout (LBO) as opponents gain strength.

Advocate investor Carl Icahn has secured more than $5 billion in financing to fuel is alternative bid that would put cash in shareholders’ wallets, keep Dell focused on growing its PC business and leave a large part of the company listed on the public stock exchanges.

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The special committee overseeing the buyout is advising Michael Dell and his backers, private equity firm Silver Lake Partners, to sweeten their $24.4 billion offer or risk losing shareholder support. Already, several institutional investors, including Southeastern Asset Management which is backing Icahn’s bid and advocating other shareholders to follow suit.

Michael Dell, according to published reports, has not responded to calls to increase his bid.

Reports indicate that Institutional Shareholder Services, an investor advisory firm, will release an advisory next week that dismisses Michael Dell’s plans and encourages shareholders to reject his LBO plan.

Michael Dell, for his part, continues to evangelize his plan, saying the Icahn counterproposal will cripple the company with debt, affect innovation and drive down employee retention.

Dell Inc. has been a public company for nearly 28 years, during which it became an icon of mass marketing and direct sales of personal computers. The direct sales model hit a wall in the mid-2000s, and Dell was forced to adopt an indirect channel strategy. Simultaneously, Dell embarked on portfolio and focus diversification, in which it adopted enterprise products in security, storage, cloud computing, virtualization and networking.

A large part of Michael Dell’s argument for going private is the need to shift away from PC sales and focus more energy on enterprise and channel-friendly business products. Despite the diversification of its product portfolio, Dell’s revenue – as much as 70 percent – is still tied to PCs, which are steadily declining in sales and profitability.

LBO opponents say there’s still plenty of life in the PC business, and don’t want to see Dell abandon the market prematurely. The opponents are not necessarily against the enterprise and services diversification.

Michael Dell and his supporters argue the company will be hamstrung in their efforts to reform the company if they must continually bow to Wall Street pressure.



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