Dell is set to disclose next week that its largest independent investor, Southeastern Asset Management, originally expressed interest in joining the proposed leveraged buyout deal that it now opposes, according to two people familiar with the matter.
On 29 January, a week before the technology company's founder, Michael Dell, and private equity firm Silver Lake Partners announced their $24.4 billion buyout bid, Southeastern and its lawyers met with one of Dell's independent directors, Alex Mandl, who was part of a special committee reviewing the company's strategic options. Also at the meeting was the committee's legal adviser, Debevoise & Plimpton LLP.
Southeastern said at the meeting that it was interested in joining the leveraged buyout and retaining a stake in Dell, said the sources who had knowledge of the Dell filing on the proposed merger, which is expected to be published as soon as next Monday. Southeastern owns 8.5% of Dell, which made its name as a personal computer maker, but now also sells business software and technology services.
Southeastern also said it would oppose any buyout in the range of $14 to $15 per share (a range that had been mentioned in some media articles) that did not permit participation by large shareholders, one of the two sources said. The proposed deal, announced on 5 February, is for $13.65 per share.
Representatives for Dell and Southeastern declined to comment. Southeastern has said publicly since the proposed buyout was announced that Dell is worth at least $24 per share, and the asset management company has been trying to persuade other shareholders to oppose the buyout.
It is unclear what Mandl's response was to Southeastern's request to join the buyout or whether Southeastern's proposal was communicated to Michael Dell and Silver Lake.
No inconsistency
People close to the Dell camp say the merger document will show Southeastern is now trying to kill a deal that it had wanted to participate in. But a person close to Southeastern said there is no inconsistency in their private discussions and public statements.
The person close to Southeastern pointed to the money manager's 8 February public letter to Dell's board, which stated Southeastern would have endorsed "a go-private type sale where current shareholders could elect to continue to participate in a new company with a public stub... Unfortunately, the proposed Silver Lake transaction falls significantly short of that."
It is unclear whether the buyout group's insistence that the company be taken private was critical in Southeastern's eventual opposition to a takeover by the Michael Dell-led group.
Managers at Alpine Capital Research, in St Louis, who have said they would vote their two million shares against the buyout, praised Southeastern, which manages the Longleaf family of funds, for sticking up for shareholders in the January talks.
"Looks positive to me," said Willem Schilpzand, an associate portfolio manager. "Sounds like Longleaf is fighting for the public leverage recap (where all shareholders stay in) or the option for shareholders to opt in to a going private deal.
"Either way, it looks like we would have the option of participating or not. That is all we can really ask for," Schilpzand said.
Dell's board has approved the Silver Lake buyout and also set a 45-day "go shop" period to see if better alternatives emerge. The period ends early Saturday morning.
Memphis-based Southeastern, led by fund managers Mason Hawkins and Staley Cates, has a lot of money riding on Dell. The fund accumulated its Dell stake - worth about $2 billion - at an average cost of $16.88 per share. That adds up to a loss of almost $400 million at the current buyout price.
Billionaire investor Carl Icahn has also thrown his weight against the buyout, arguing that Dell should borrow money to pay shareholders a special dividend of $9 per share instead. He has not disclosed the size of his stake, but CNBC reported on 6 March that he owned about 100 million shares, or 6% of Dell.
The buyout requires approval from a majority of shareholders excluding Michael Dell, who controls about 16%. Southeastern and several publicly declared allies, such as fund manager T Rowe Price, control at least 14%.
Under the gun
Some analysts and rival fund managers say Southeastern's activism is a sign the fund is feeling pressure to perform, after losses in the aftermath of the financial crisis marred an otherwise strong track record.
Hawkins and Cates often say they succeed by being right 60% of the time. Now they have to convince other Dell shareholders that this particular case does not count among the other 40% - when they're wrong.
Longleaf boasts a strong record, helped by outperformance in the first bear market of the 2000s. It gained an average of 6.55% a year over the past 15, beating the Standard & Poor's 500 Index by more than two percentage points a year and coming in ahead of 91% of similar funds, according to data from Lipper, a unit of Thomson Reuters.
But it stumbled through the financial crisis, losing over 50% of its value in 2008 versus S&P's 37% decline.
When Southeastern first bought into Dell in 2005 in the mid-$30s range, the firm crowed to investors in an annual report that it was paying "fire-sale prices". Dell is now trading at less than half that.
The firm has used activism rarely and only as the last resort after an initial investment has gone wrong. It has gotten involved as an activist 25 times in 23 US companies since 1996. Dell is the largest company it has so far taken on, nearly double the value of second-ranked Chesapeake Energy, according to FactSet's SharkRepellent research service.
Last year, it lobbied for changes at Chesapeake after a series of Reuters reports that CEO Aubrey McClendon had been borrowing from a lender who was also a big source of funding to the company. McClendon left the company this year, but Southeastern was left with an estimated loss of $300 million to $400 million on its $2.3 billion original investment.
Financial adviser Peter Gellman in Highland Park, New Jersey, who has for years invested in Longleaf, said all value investors "have some black spots on their record".
"No one is perfect," said Gellman, who supports the firm's stance with Dell. "They will get active when they judge it appropriate - they're not hyper-active."
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