Dell vs. Icahn: Betting on a sure thing

Posted by Robert Enderle

Taking Dell private was never going to be an easy task. It is a big corporation and pulling together the cash to make this happen while jumping through all of the regulatory hoops would, for many CEOs, be more effort than it is worth.  

But founders tend to treat their companies far differently simply because they see them as their legacy. Case in point? Michael Dell, who put together a fair offer for the shares at a premium over market. However, he then ran into two large investors who thought they could do better, although after examining the books one investor dropped out, effectively admitting that Dell’s offer was better than anything else he could come up with.  

Nevertheless, Carl Icahn doubled down by buying more Dell shares and tried to threaten Michael into sweetening the deal by implying that Icahn would otherwise buy the company and effectively destroy it. 

Dell’s Vulnerability

Founders are very vulnerable to this kind of an attack because they often think of their company and employees like family and want to protect them. It’s really less about Michael Dell being vulnerable than Carl Icahn being convinced of this vulnerability and thinking he can get Dell to sweeten his bid - or otherwise find a way to pay Icahn to stop throwing his body at the buyout.   

Dell has something to protect and Icahn doesn’t, making this somewhat of a one-sided battle. Meaning, Dell (currently) can’t even vote his own shares while Icahn controls a smaller block of shares he can influence or vote. We come back to why going private is so rarely done because folks like Icahn can use the process to effectively attempt to extort money from the company.  

However Icahn Can’t Execute

However, Michael Dell’s been around the block a few times and likely knows that it is unlikely Icahn will have enough votes to have his poorly funded "better deal" approved or the board replaced. You may recall he tried something similar from a far stronger position with Yahoo, yet all he did was put Yahoo in a weaker position largely because he couldn’t execute.  

While Icahn has billions and can easily, and apparently freely, use his vast wealth to gamble that a CEO or board will fold in what seems to be a high stakes game of poker (with lots of bluffing), this is a pretty conservative market and it is unlikely that other professional investors are likely to side with Icahn. Perhaps this is because he is calling for a $9 dividend but suggests folks will actually get $12 a share (maybe the rest is monopoly money)?

Dividend would leave the company virtually without the ability to fight in a highly contested market and incapable of funding restructure without massive borrowing. This makes it likely the firm would have to be eventually sold for assets - possibly reducing the result to a penny stock until the doors were shut forever. I’m having a bit of difficulty figuring out what bank would fund this particular scheme, especially given the firm would likely have to default on the debt at some point in the future. Granted, the economic collapse was caused by deals like this and banks can be stupid, but this seems like an especially huge reach this year. Remember, the board has the obligation of assuring Dell remains a going concern. So not only would Icahn’s plan make this very unlikely, a decision in his favor would be personally risky. 

ISS to the Rescue

If Icahn is Dell’s Nightmare ISS, Institutional Shareholder Services a well-regarded independent shareholder advisory group, came out on Dell’s side. What is particularly interesting about the ISS report? They point out that with the Dell deal, stockholders effectively sell the risk to Michael Dell and his backers. This is a very conservative market with most investors seeking to avoid risk, so the ISS analysis plays well to that concern - and given they are not aligned with any party their opinion comes with greater credibility than either Carl Icahn or Michael Dell could achieve themselves. Clearly, Icahn is not amused with ISS standings but it is hard to overcome a clear endorsement by a well-regarded external service who specializes in this kind of a transaction. While this group has sometimes backed Icahn’s efforts, as they did with Forest Labs, showcasing their independence.   

Wrapping Up:  

The reason I think Icahn will fail is that his history, and it’s worth reading, is one of mostly destroying companies - with TWA being one of his most famous. As you may recall, TWA was one of the most powerful carriers in the US and Icahn systematically destroyed it. He clearly does make money but employees and other investors obviously pay a very high price for it. I think most firms will choose to back the guy who wants to build something rather than the guy that wants to kill the company and hope to sell the parts for a profit. It’s not that there aren’t other mercenary folks, it’s the hope part, right now the market likes the idea of a sure thing and whatever else Icahn is, a sure thing he isn’t.   

That’s why I think Icahn will fail, banks aren’t stupid enough to fund his plan, stockholders are foolish enough to believe him, and, in the end, the majority of folks just want a good return; they aren’t in this to kill a company and take a huge risk in the process.