Why Icahn's Dell plan could be a FUD nightmare

Why Icahn's Dell plan could be a FUD nightmare

Summary: Carl Icahn's proposal might severely damage Dell as a serious enterprise technology player when the fear uncertainty and doubt parade starts rolling.


Dell's move to go private has become very complicated as investor Carl Icahn has acquired a hefty stake in the company so he can push for a special dividend to shareholders of nine dollars a share and more leverage.

Icahn's proposal, which revolves around roughly a six percent stake in Dell according to CNBC, could be good for Dell shareholders.

Unfortunately, Icahn's proposal might severely damage Dell as a serious enterprise technology player when the fear uncertainty and doubt parade starts rolling.

According to Icahn's letter to Dell the investor's master plan goes like this (emphasis mine):

Rather than engage in the Going Private Transaction, we propose that Dell announce that in the event that the Going Private Transaction is voted down by shareholders, Dell will immediately declare and pay a special dividend of $9 per share comprised of proceeds from the following sources: (1) $4.26 per share, or $7.4 Billion, from available cash as proposed in the Going Private Transaction, (2) $1.73 per share, or $3 Billion, from factoring existing commercial and consumer receivables as proposed in the Going Private Transaction, and (3) $4.26, or $5.25 Billion in new debt.

We believe that such a transaction is superior to the Going Private Transaction because we value the pro forma "stub" at $13.81 per share using a discounted cash flow valuation methodology based on a consensus of analyst forecasts. The "stub" value of $13.81 combined with our proposed $9.00 special dividend gives Dell shareholders a total value of $22.81 per share, representing a 67% premium to the $13.65 per share price proposed in the Going Private Transaction. We have spent a great deal of time and effort in determining the $22.81 per share value and would be pleased to meet with you to share our analysis and to understand why you disagree, if you do.


Here's a simplification of Icahn's proposal:

  1. Dell would take on more debt to pay a dividend to shareholders.
  2. Dell would leverage its receivables to pay out some of that dividend.
  3. Dell's cash position would be eroded.

Given those three moving parts, it's no surprise that Jefferies analyst Peter Misek noted that Icahn's leveraged scenario is a worst-case scenario. Misek noted that net leverage would still be manageable in each scenario, but Dell would face more interest rate expenses each year. Historically, companies leverage and recapitalize and lose flexibility.

Misek said:

We have updated our leveraged recap model post-earnings. We think that Icahn would likely be satisfied with a raised bid to $15, which we think would be higher than the potential stock price realized from a leveraged recap. Even if the deal does not get shareholder approval, we view the leveraged recap as the worst-case scenario.

Rest assured, Icahn won't give a hoot about Dell once the dividend is paid out in his scenario. As a result, Dell could have a lot less flexibility — due to debt — to refashion itself as a mini IBM. Dell will also have less cash to compete with Lenovo and HP. It's worth mentioning that both Lenovo and HP are looking at Dell as a potential acquisition (wink wink). Simply put, HP and Lenovo are saying they might be interested in Dell so they can get all the data possible on a rival.

Should Icahn get his way, rivals will have a field day with Dell. HP wasted no time mocking Dell's plan to go private and noted the company would have too much debt. If Dell takes on more debt, every competitor will note that the company will be saddled whether it's reality or not.

Also: Dell goes private: 10 big unknowns

All Dell competitors have to do is cast some doubt on the company and they can win deals. In other words, FUD works. HP knows this lesson well. Oracle launched a war on Intel's Itanium chip, which powers HP's high-end systems, and HP's sales in that department never recovered (to date).

Maybe if Dell were debt free, leveraging the model for a payout wouldn't be so bad. The reality is that Dell has a decent bit of debt now. As of Feb. 1, Dell had $12.57 billion in cash and equivalents as well as $3.84 billion in short term debt and another $5.24 billion in long term debt.

It's worth noting that the debt current (total debt divided by total assets) ratio for Dell, IBM and HP are all in the same range. HP's debt quick ratio is 1.12 and IBM's is 1.13 and Dell checks in at 1.19. If Icahn's deal changes those ratios, rest assured Dell will make for an easy target.

Topics: Hardware, Data Centers, Dell, Hewlett-Packard, IBM, Servers, Tech Industry

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  • What About the Financing

    Would Microsoft be happy that 39% of its loan is diverted to giving Icahn a cookie so he goes away? (I seem to recall Icahn getting into the Microsoft-Yahoo! thing a few years back.) Was the financing contingent on a share buyback price?
  • Icahn

    History shows that Icahn is only interested in one thing, what's best for himself.
    • And why not?

      It's his money and his 6% stake. It's his god given right to do what's good for him.

      If you, Micheal or Microsoft think otherwise, then put your money where your mouth is and buy out all the shares for what they're worth for.
  • Carl, the corporate raider, Icahn

    Icahn's playbook:
    - Buy a controlling stake.
    - Loot the company assets.
    - Discard the smoking crater.

    Say your goodbyes to Dell.
    • BTW, the special dividend scam was Mitt Romney's favorite scam

      at Bain Capital to suck the life blood out of companies. Romney would have made Bush look like philanthropist. Hahaha.
      • The above brought to you

        By Low-information Voter, inc. Proudly proclaiming ignorance since the Florida 2000 recount.
        • If you believe in either of these two Fascist parties

          Dems or Repubs, you are the low information person. They are both wh0res to the corporations and rapidly turning the US into a Banana Republic.
        • Forget Bain

          Icahn is almost exactly like the description in the OP. As someone else said, he's the real life embodiment of Gordon Gecko.
  • Icahn

    If there is a living person who most closely resembles Gordon Gecko it's Carl Icahn.
    Alan Smithie
  • Ah yes...

    Ah, yes... and everyday we're being told that the reason the U.S. is in economic trouble is the single mom working two jobs, but still not making enough money to owe taxes after deductions. If only we find a way to jack up her taxes while giving a nice big tax break to "Job Creators" like Mr. Icahn, everything will be so much better.
    • Why jack up anyone's taxes?

      The Treasury is bringing in $2.7 trillion this year. Are you seriously trying to tell us that $9,000 per man, woman and child in federal revenue is not enough?

      Oh, and just FYI, that single mom working two jobs qualifies for almost $40,000 a year in welfare benefits if she has two children.
      • Wow $40k a year...

        Really? I want to see the figures on that!

        According to: http://www.welfareinfo.org/payments/ a family of 4 can get upwards of $900 a month cash and $586 food stamps based on family of 4 paying $650 month rent and taking the standard utilities deduction. So, even if you arbitrarily give them a $250 "insurance premium" for their medical they get free.... That's still only $20k PER year for twice as many kids. Okay, okay...there is a small possibility that same family COULD qualify for Section 8 housing as well, which, in this case could drop their rent to $100 a month....so even though they aren't earning more, they are technically receiving another $550 from the government per month...soooo that's $26,600 approx..... of government money (even though the family only REALLY receives in hand cash and food stamp of: $900+$586= $1,486.

        A FAR CRY from your bull about $40k for a year.

        Ohhh...and HTC, never liked them anyways. :)
        I.R. Fleeceum
  • when companies go public

    they open themselves up to this kind of danger. But I assume that going public is not due to greed, right?
    Companies know full well what kind of Russian rulette they are playing, and yet they scream fould when they get hurt.
  • More of the modern version of twisted capitalism run amuck.

    Just another self enrichment scheme from just another Wall Street greed factory.
    Nowadays a companies growth and success is far down the list for most private equity.
    • I'm curious. Is Dell required to accept these terms?

      If not, then why are you acting like they are? Why are you criticizing an economic system that allows Dell the choice of how and when to take investor money? Do you prefer the system where the government takes your money by force and gives it to businesses it picks and chooses? Because that has worked out so well.
  • Dell and Icahn belong together

    Both are junk. Good riddance, Dull.
  • Dear Icahn,

    you kill companies. Go away. Now.

    Sincerely, America.

    PS - Even Mitt Romney's former company, Bain, isn't anywhere as bad as you are.
  • So Much For Dell Shares Being "Undervalued"

    As I recall, Dell's excuse for running away from the stock market was that its share price somehow didn't reflect the "real" value of the company. Turns out that wasn't true (otherwise shareholders would be more willing to sell). So what was the real reason?
  • When asked what Micheal Dell would do with Apple in 1997

    "What would I do? I'd shut it down and give the money back to the sharehold", said Michael Dell.

    How is this different from what Icahns is asking for?

    People defending Dell don't have a leg to stand on. You rant about capitalism run amok like children carrying their parent's briefcase and pretending to go to the office.

    If Microsoft thought they could fool people by just waltzing in and gaining control Dell for a paltry sum $2billion like they did with Nokia, they're mistaken. You can fool some people, some of the time.