Even Carl Icahn Wants To Wrap Up This Dell Thing


Carl Icahn's ideal literary genre may be the press release - or, possibly, the tweet - but sometimes you want to write at length and filing a 25-page complaint in the Delaware Court of Chancery gives you that luxury. Plus I guess some lawyers to write it, but the complaint Icahn filed against Dell today is pretty Icahn-y, in that it is full of colorful language and doesn't seem to be all that connected to any, y'know, legal theory. Basically he's mad at Dell's board for offering to move the special meeting on the merger to September, so he's suing to stop them from doing it, even though they haven't done it. And his theory is that, by moving the special meeting and the associated record date, Dell is putting more votes into the hands of merger arbs, as part of its nefarious plan to convince long-term shareholders to sell by talking down the stock. I found this passage downright poetic:

[A] change in record date could be dispositive because from the middle of June onward the board and Mr. Dell, faced with massive stockholder resistance to the Merger, engaged in a concerted effort to convince long-term stockholders who oppose the Merger that Dell is facing enormous economic headwinds and that the market value of the Company’s stock will fall off a cliff if the Merger is voted down. Part of the purpose of these presentations was to cause the anti-Merger stockholders to sell their shares with the knowledge that many of those shares would be bought by arbitrageurs who could be counted on to support the Merger if the record date was reset.

That campaign has been deeply cynical. Immediately after the Merger is approved by stockholders, the Company and its investment bankers will be trying to syndicate the financing necessary to consummate the highly leveraged Merger, and there is no possibility that the Company will be telling debt investors that the sky is falling. Indeed, the Power Point presentations showing that the Company can easily shoulder the new acquisition debt of $15.75 billion must already be drafted and resting in the servers and hard drives of both Dell and its investment bankers, where they coexist uneasily with the presentations to the stockholders saying that Dell could lose half its value if the Merger is not approved.

Mostly I just love the anthropomorphism of those debt presentations, trying to get some rest on their servers but glancing nervously over at the entirely contrary equity presentations. But, also, true, right? It can't be entirely comfortable, for the deal's sponsors or for their computer files, to have to pitch shareholders on the notion that sticking around in Dell is too risky - and that a leveraged recap is impossibly risky - while also pitching debt investors on the notion that an even more leveraged buyout is just fine.1

Still I am a little boggled about what the Delaware Chancery court is supposed to do about it. Tell it to the shareholders, y'know? Icahn's more interesting goal is to get a judge to say: okay, you can delay the meeting, but if you do you have to have a single meeting to vote on Michael Dell's deal and Icahn's proxy fight. There's a lot of blather but the gist is:

Plaintiffs reiterated ... their intent to run a slate of directors at the Company’s annual meeting, which, if elected, would implement the [Icahn tender-offer] recapitalization. Thus, Plaintiffs implored the Dell board to “do everything necessary to create a level playing field, including holding the annual meeting and the vote on the Going Private Transaction at a single meeting.” ... The Dell board refused to permit a level playing field. Instead, the director defendants decided not to hold the annual meeting in July as has been Dell’s practice for many years. Instead, they indefinitely deferred the annual meeting and it appears they still have made no effort to schedule such a meeting. Thus, the director defendants tilted the playing field in favor of the Merger and against the recapitalization proposed by Plaintiffs.

The effect of this was to leave Dell’s stockholders with the choice of accepting an immediate cash payment of $13.65 pursuant to the Merger or incurring the market risk of waiting an unknown number of months until Plaintiffs’ nominees can be elected and potentially implement the proposed recapitalization if financing is still available. That delay, and the market risk caused by it, was intended to render the recapitalization less attractive than it should be, and to push stockholders into voting for the Merger.

It's not clear that the court could or would mandate it, but Icahn throws in a plea to require the board to have both votes at the same time, and that definitely has a certain appeal. Last week Ronald Barusch mapped out what seems like a fair head-to-head solution that would let shareholders vote once and for all to (1) take the Michael Dell/Silver Lake LBO deal, (2) embark on the Icahn/Southeastern proxy-fight-and-recap adventure, or (3) reject both options and send all of those jokers packing.2 If the board does want to delay this until September, it could have the annual meeting at the same time and resolve everything at once. Which seems fair, sure, but more importantly seems final. One vote, no tears: I suspect a lot of people would take the tradeoff of pushing the vote to September in exchange for a guarantee that, after that, it'll be done, one way or another or that third way. Because right now it just seems endless.

High River L.P. et al. v. Dell Inc. [Del. Ch. via Bloomberg Law]
Carl Icahn Sues to Stop Dell From Delaying Vote [WSJ]
Icahn Sues Dell to Halt Changes to Buyout Vote [DealBook]

1.Icahn latches cleverly on to the board's arguments that imply a really crap public-company price for a deal-less Dell:

One noteworthy slide, which was used in many of the presentations given by Dell and its directors, and which has never been changed, indicated that if the Merger were voted down the stock would probably be worth no more than the multiples used to value Hewlett-Packard’s stock, which implied a range in values from $5.88 to $8.72 per share for Dell’s shares—far below the Merger price of $13.65 per share. ... Dell is implying that the equity value of the Company if the Merger is rejected would range from $10.3 to $15.3 billion.

In the case of Dell, equity value equals total enterprise value because Dell holds approximately $13.2 billion in cash and investments, while it had only approximately $7.2 billion in short and long-term debt, giving it a negative net debt number of approximately $6 billion. ...

What makes those numbers extremely awkward for Dell is the fact that according to the Merger proxy statement, the Merger will be financed by new borrowings of up to $2 billion in subordinated debt from Microsoft and an additional $13.75 billion in syndicated debt. That totals $15.75 billion in new debt to fund the Merger—or more than the implied enterprise value of the entire Company. The syndication of that debt will start immediately after there is a favorable vote on the Merger. One can safely presume that none of Dell, Mr. Dell or the members of the board are going to be telling the purchasers of the debt that the Company is worth less than they are lending it. Indeed, one can safely presume that at this very minute presentations are prepared that will explain how the Company’s actual and projected EBITDA will clearly cover the debt charges, and that any reasonable valuation using the figures in those presentations would show the Company to have an enterprise valuation equal to or above that implied by the Merger price, which is approximately $25 billion.

2.Incidentally yesterday Barusch also correctly pointed out that record dates are a silly anachronism.