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Billionaire Carl Icahn looks to a bet on Dell's future

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A photo of Carl Ichan. [File photo]

Billionaire Carl Icahn, seeking to scuttle a buyout led by Silver Lake Management LLC, is asking Dell Inc investors to bet on a computer maker beset by rising competition, tumbling demand and a bigger debt load.

Icahn's deal, which would maintain Dell as a publicly traded company, includes $12 shares that investors would be paid in cash or additional Dell stock, according to a filing. The payout would dilute existing Dell shares, which Icahn said would have a value of at least $1.65 apiece. That compares with $13.65 a share in cash offered by Michael Dell and Silver Lake.

To prevail, Icahn will have to persuade those investors who want to keep an equity stake in Dell that fresh leadership can do a better job playing catch-up in cloud computing while managing greater debt and combating the biggest sales decline in the history of personal computing.

Investors who don't want Dell stock face bigger risks under Icahn's plan. While they would receive $12 a share, there's no guarantee that they'll be able to find a buyer willing to pay $1.65 or more for their existing holdings - a prospect that may make the Silver Lake-Dell bid more alluring.

"We don't see this as a superior proposal" to the buyout from Silver Lake and Michael Dell, Louis Meyer, a special situations analyst at Oscar Gruss & Son Inc, said of Icahn's plan. "Most shareholders will be glad to take the LBO."

Dell rose 1 percent to $13.45 at the close on Friday in New York. The shares have climbed 33 percent this year. The company has lost more than $100 billion in market value since the stock's peak in March 2000.

Superior offer?

Icahn and Southeastern Asset Management Inc, his partner in the deal, own a combined 13 percent stake and said in Friday's filing that their proposal gives investors a chance to benefit from potential future growth at Dell, which is based in Round Rock, Texas.

"Mathematically, there is no question it is superior," Icahn said in an interview on Bloomberg Television. "You have a choice of getting $12 and still owning Dell, which has great potential."

In a letter to Dell's board, the group said that each share would be worth more than $1.65 under its scenario - $1.98 to $5.35 - assuming the remaining public portion of Dell trades at four to six times projected annual pretax earnings of 50 cents to 89 cents a share.

"It's an upgrade from Dell's offer," said Donald Yacktman, whose firm, Yacktman Asset Management, based in Austin, Texas, owns almost 15 million Dell shares. "It gives investors the chance to choose what they want."

Adding debt

Still, owning Dell hasn't been such an attractive option for shareholders in recent years. The shares were trading above $30 in 2007 after Michael Dell returned as CEO following a hiatus, yet they have been sinking amid plummeting demand for PCs and accelerating competition for selling the data-center products and services Dell has opened its coffers to acquire.

Icahn's proposal would load $5.2 billion in new debt on to a company that remains publicly traded, hampering its ability to spend on the research and development and deals needed to become more formidable in enterprise computing, said Jeff Fidacaro, an analyst at Monness Crespi Hardt & Co in New York.

"By increasing the debt and paying out a special dividend, you're taking away some of the flexibility to diversify away from PCs," said Fidacaro, who has a neutral rating on the shares. "I'd prefer they focus investments on executing the transition rather than providing immediate return today."

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