Thursday, March 7, 2013

Dell Receives The Letter from Icahn

In our whimsical scenario, Michael Dell had received a letter from Warren Buffett. Subsequently, Dell has received a follow-up letter from Southeastern Asset Management.  Today, Dell has received "The Letter," from Carl Icahn.  Here's an excerpt from the letter, as reported in the Wall Street Journal,

"Dear Board Members:We are substantial holders of Dell Inc. shares. Having reviewed the Going Private Transaction, we believe that it is not in the best interests of Dell shareholders and substantially undervalues the company.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 proforma “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."
It's very clear, simply written and entirely consistent with the initial ideas proposed by Southeastern Asset, supported by T. Rowe Price and other large shareholders.  The letter raises another good point, namely that the way in which the Going Private Transaction was handled by the CEO and Board of Directors make it a related party transaction.  It certainly looks and smells that way.  So far, this is a case where shareholders are duly and respectfully exercising their rights to be treated fairly by their company.

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