Two of the most prominent figures on Wall Street — Carl Icahn, the famed corporate raider turned “activist investor,” and Stephen Schwarzman, the billionaire behind private equity behemoth Blackstone Group — have expressed interest in bidding for PC pioneer Dell. This development sets up a challenge to company founder Michael Dell, who has proposed taking the company private in a $24 billion leveraged buyout.
Why are these billionaires fighting over a struggling PC maker that largely missed the mobile revolution and has been unable to match wildly successful products from the likes of Apple, Google and Samsung?
For Wall Street predators like Icahn and Schwarzman, Dell is an attractive target, like a wounded dolphin to a Great White shark. Dell has been battered thanks to a decline in the PC market as users increasingly adopt smartphones and tablets. Overall PC shipments fell 3.2% last year, with Dell sales decreasing by 21%, according to data from research firm IDC. By contrast, tablet sales jumped 72% in 2012 and will increase by 54% this year, according to JPMorgan data. Yet Dell remains the number three PC maker worldwide after Lenovo and Hewlett-Packard, and last quarter reported profit of $530 million on revenue of $14.1 billion.
In January, Michael Dell announced his plan to take the company private along with private equity firm Silver Lake Partners. The deal, which would be valued at more than $24 billion, would be the largest leveraged buyout since the financial crisis, and would involve Microsoft kicking in a $2 billion loan. Dell argues that by taking Dell private, he will have more flexibility to turn the company around without short-term pressure from Wall Street investors and analysts. The company has been talking about engineering a strategic shift away from consumer PC sales — which still account for 70% of its revenue — and toward business clients, as IBM has done over the past decade.
As part of his proposal, Michael Dell struck a deal with the company’s board allowing it to solicit rival bids during a 45-day “go shop” period. Two new bids emerged over the weekend, with both Blackstone and Icahn offering slightly more than the $13.65 per share that Michael Dell and Silver Lake have proposed paying existing shareholders. Icahn has a track record of targeting companies that he feels are undervalued in order to boost their stock prices. Schwarzman’s Blackstone Group invests in struggling companies and will often break them up or make management changes with the goal of boosting the bottom line.
Although the details of the two new bids remain vague, each would keep a so-called “stub” of Dell public, which would give shareholders who choose not to sell their stock the opportunity to profit if the company can execute its turnaround. Bill Nygren, co-manager of the Oakmark Fund, which owns about 25 million Dell shares, welcomed the Blackstone and Icahn proposals. “Given the wide range of estimated values for Dell shares, if all else is nearly equal, we believe a proposal is superior if it allows investors who want to remain invested in Dell the opportunity to do so,” Nygren said in comments cited by Reuters and the Associated Press.
Nygren isn’t alone is supporting the new bids: The company’s largest outside shareholder, Southeastern Asset Management, which owns 8.4% of the company, has criticized Dell’s offer as too low. Notably, if either Icahn or Blackstone is successful, it could lead to the departure of Michael Dell, who founded the company three decades ago in his University of Texas dorm room.
According to its proposal, Blackstone will offer more than $14.25 per share to existing shareholders who want to cash out. Shareholders who wish to participate in the “ongoing upside of the company” will receive shares valued in excess of $14.25 as part of the deal, according to the private equity giant. Under Blackstone’s plan, Dell would continue to be publicly traded on the NASDAQ stock exchange. Blackstone would still need to line up financing for the deal, but said it has received a letter from Morgan Stanley supporting the firm’s ability to raise the needed debt financing for the deal.
Several reports have suggested that Blackstone could seek to spin-off Dell’s financial services unit, which provides loans to Dell consumers, in a transaction that could fetch $5 billion and help pay for the overall deal. (Private equity firms frequently break up their targets, believing that the constituent parts are more valuable than the intact firm itself.) GE Capital is said to be interested, but Michael Dell has reportedly objected to that idea. He plans to meet with Blackstone, which has encouraged the founder to include his 14% stake in any transaction.
Icahn, meanwhile, has proposed paying $15 per share for 58% of Dell, in a deal that will involve Icahn injecting a total of $5 billion into the company. The remaining 42% of the company would move forward as a publicly traded “stub.” Icahn already owns $1 billion worth of Dell shares, and argues that many shareholders want to remain as investors. Late Monday, word emerged that Icahn plans to review Blackstone’s offer and might consider working together with the private equity giant in a joint bid.
As the bidding war plays out, the process looks likely to benefit existing Dell investors, Sterne Agee analyst Shaw Wu told the AP. “What is going on now is quite good for Dell shareholders,” Wu said. “It’s a bit like a bailout.”