Today will be a very interesting day for Dell Inc., and perhaps the turning point in its future development, as activist investor Carl Icahn will flex his muscle to defeat the current plan to take the vendor private and install new management. And the outcome of this fight could have significant implications for the channel.
Today is the deadline for shareholders to propose alternative slates for the company’s board of directors. Icahn says the current board is giving the company away if it accepts CEO Michael Dell’s offer to buy the company and take it off the stock market for $13.65 per share. Icahn’s plan: Defeat Michael Dell’s offer, install a new board of directors and replace the company’s management.
“There’s going to be a vote on whether or not they want to accept the Dell offer. Southeastern and I will vote against that offer. We have 14 percent. We are very hopeful we will get that defeated. Once they defeat that, they can cover for our slate. We will take the company over and immediately give them $12 if they wish. They still will own Dell stock. Dell stock is worth much more than $1.65,″ Icahn told Bloomberg Television in an extensive interview Friday.
In February, Michael Dell – the company’s founder – announced plans to take the company private as part of a broader plan to reoriented the company around software, cloud computing and enterprise services. As a private company, Dell (the company) would have far greater latitude in executing development plans without reacting to Wall Street performance demands.
The Dell board is currently considering three plans – the Icahn offer that would give shareholders’ cash and retain their stock, the Dell deal proffered with private equity firm Silver Lake Partners, and a competing bid by Blackstone Group. All the deals are valued between $22 and $25 billion; the structure and outcomes are what’s different.
A large part of Icahn’s motivation is his perception that Dell is running away its PC business, which has steadily declined with the rest of the market. Dell, once the world’s largest PC manufacturer, has slipped behind Hewlett-Packard and Lenovo in recent years and continues to fade. Dell acquired a series of companies, including Equal Logic, SonicWall, Wyse Technologies and Compellent – to transform its business to a more enterprise focus. But those transformation efforts are still works in progress.
Icahn doesn’t dispute the PC market is declining, but believes there’s enough life left to warrant maintaining and expanding the Dell share of the business. He even suggested that Dell could acquire another PC company or the investor group could buy a company, and then merge Dell with the other assets. The top of the list: HP.
“The PC business is going downhill. In the case of Dell, we believe it will take a long time for it to go downhill. We believe the PC business is still extremely attractive for the short-term because it’s necessary. PC’s are not going way. Microsoft depends on Dells and Hewlett-Packards. We might acquire somebody in the business like Hewlett-Packard,” Icahn said.
Ironically, a deal with HP could be an option. The company was just slapped with a multi-billion dollar lawsuit over the handling of the disposition of WebOS and its 2011 ill-fated tablet launch, the botched acquisition of big data software vendor Autonomy and former CEO Leo Apotheker signaling a potential sale of the $40 billion PC business. Within two days of those announcements in August 2011, HP stock value lost $16 billion.
Under current CEO Meg Whitman, HP has stabilized the company, but still has a long way to go for full recovery. Whitman has said PCs will remain a part of the HP portfolio. However, she’s also said that HP could consider selling off underperforming divisions and assets.
“There is a shot down the road that we could – with the PC Business – merge with Hewlett-Packard,” Icahn said.
If Icahn succeeds in his coup, it could mean the end of an era with the almost-certain ouster of Michael Dell from the CEO post and, most likely, the company. Even though Dell has tried reversing the company’s sales and revenue declines by investing in new markets and technologies, Icahn said he doesn’t think the founder has done a good enough job.
“I have nothing against Michael Dell. I have respect for him. I laughingly say that I respect the way he has gotten the board to give him this bargain. I’ve never met him. I think he’s a smart guy, but he would not be the one to run this company,” Icahn said.
The implications for Dell’s sprawling channel are significant. While Dell has done a tremendous job of converting itself from a volume-based direct sales company to a channel-centric vendor with midmarket and enterprise products, its partner community awaits the outcome of this ownership battle. Most partners agree with Dell’s decision to go private, but the uncertainty of ownership and consequent changes if current management is ousted could cause disruptions in channel programs and operations.
The consequences for the broader channel could be far more severe if Icahn gains control of Dell and looks to merge with another vendor or acquire another PC business, has he suggested. A mega-PC merger would reorient practically the entire channel, causing some solution providers to lose their long-earned status and forced to change their operating relationship with the emerging company.
The factor weighing in Dell’s partners is the debt that each of the potential acquirers will have to take in any takeover deal. Icahn’s proposal would require his group to borrow as much as $5.5 billion. The Michael Dell group is borrowing $15 billion to $17 billion. With that much red ink on the books, accelerating sales and revenue will be a top priority – and that means no channel disruptions.
