Dell Inc. (NASDAQ:DELL) founder Michael Dell, with help from private-equity firm Silver Lake Partners, hopes to take his company private by paying $13.65 in cash for each share of Dell stock. However, Carl Icahn’s Carl Icahn Enterprises LP (NASDAQ:IEP) fund recently joined with Southeastern Asset Management (the largest shareholder aside from Michael Dell himself) to offer a rival buyout proposal.
The Icahn-Southeastern proposal entails using much of Dell’s cash and adding some debt to pay a $12 special dividend to Dell shareholders. (This type of financial maneuver is called a leveraged recapitalization.) However, the proposal is particularly interesting because it gives shareholders the option of receiving the $12 in cash, or in additional Dell stock valued at $1.65 per share.
To persuade shareholders to adopt his proposal rather than accept Michael Dell’s buyout offer, Carl Icahn Enterprises LP (NASDAQ:IEP) will need to convince at least half of the ownership base that the stub stock will be worth more than $1.65 per share. Otherwise, Dell shareholders would be better off taking $13.65 in cash from Michael Dell Inc. (NASDAQ:DELL). On the other hand, if Icahn is too convincing about the stub stock’s upside, everybody will want extra Dell stock rather than cash, which would defeat the purpose of his leveraged recapitalization plan.
Cash or stock?
Icahn and Southeastern have already announced that they will decline cash payments in favor of additional stock. Together, they own approximately 13% of Dell Inc. (NASDAQ:DELL) stock — roughly 230 million shares. After receiving additional stock in lieu of the $12 cash payment, they would own 1.9 billion shares. Overall, they expect 20% of the shareholder base to take extra stock instead of cash.
However, Carl Icahn Enterprises LP (NASDAQ:IEP) and Southeastern face a thorny problem. Assume that you’re a Dell shareholder. If you believe that the stub stock will be worth less than $1.65, you’ll be better off taking a $13.65 cash payment from Michael Dell Inc. (NASDAQ:DELL) and Silver Lake rather than a $12 payment and a stub stock from Icahn and Southeastern.
On the other hand, if you believe that the stub stock will be worth more than $1.65, you’d probably be better off declining the proposed $12 cash payment in favor of extra stock. That’s because you’d be paying just $1.65 a share for the extra Dell Inc. (NASDAQ:DELL) stock (which, by assumption, is worth more than $1.65).
To prevent the Dell-Silver Lake transaction from being approved, Icahn and Southeastern need to persuade at least half of the Dell shareholder base to vote against the agreement. They’re trying to do this by calling the Dell-Silver Lake transaction “The Great Giveaway,” and arguing that Dell Inc. (NASDAQ:DELL) could perform much better under new management.