When I first heard that Carl Icahn was considering bidding for Dell, I was quite surprised. Icahn's not a private equity guy who buys and develops portfolio companies. Instead, he's a fast buck artist who specializes in pure financial plays. His few high profile efforts to actually manage a business have ended disastrously, as when he asset stripped TWA before driving it into the ground once and for all. See Time to Sell! World’s “worst stock picker” Carl Icahn buys into Brazilian mining company, for an overview of Icahn's ineptitude as an investor/manager. He can only make money as a raider, looter, and greenmailer.
Fortunately, we have Steven Davidoff to dig through these stories and come up with the goods:
Mr. Icahn has reportedly acquired 6 percent of Dell and is now proposing two alternatives to the buyout.
The first is that if the proposed acquisition is voted down, the computer maker’s board should immediately declare a dividend of $9 a share, taking on an additional $5.25 billion of debt to pay for it. According to Mr. Icahn, Dell stock is worth roughly $13.81 a share, so shareholders would have a total value of $22.81 a share.
If the board does not implement his proposed dividend recapitalization, Mr. Icahn then indicated that Dell should commit to hold its annual meeting at the same time shareholders vote on the deal. Mr. Icahn then generously promised to run his own slate of directors to replace the current board.
If his slate proved victorious, Mr. Icahn’s handpicked directors could then implement his first proposal. In that instance, Mr. Icahn also promised to provide this $5.25 billion loan from his own personal wealth and that of his own fund.
In other words, Icahn has no interest in running in Dell. Instead, he's looking for a quick payout that will leave Dell with huge debt and, in all probability, unable to compete in the turbulent PC market.
Unfortunately, Dell's board probably has little legal room to maneuver against Icahn. Because Dell and his buyout partners proposed taking the company private, there is a proposed change of control triggering Revlon duties. See my article The Geography of Revlon-Land (July 23, 2012). 81 Fordham Law Review, (Forthcoming 2013); available at SSRN: http://ssrn.com/abstract=2115769. As a result, Dell's board may only consider short term shareholder wealth maximization--they must get the highest possible price.
But does that make any sense? Should directors really be forced to sell into a financial play that maximizes short term payout at the cost of leaving the company swamped by debt and at risk of collapse?
One hope is that the Delaware courts decide that Revlon does not apply to Icahn's bid, since it seems to contemplate leaving a public stub of shareholders. As Davidoff notes:
... in either case, if Blackstone or Mr. Icahn gets to this final bid stage (and remember either may not make a final bid – what is happening right now is really a placeholder), this will not be an easy decision for the Dell board. It will not be simply considering who is the highest bidder for the entire company. Instead, it will probably have to weigh proposals that keep part of the company public, and this will mean weighing the value of a future Dell. This is not the easy determination of merely weighing cash bids – there you pick the highest. Instead, the board will have to assess the value of what may be a highly leveraged Dell without its current management and a declining business model. In this situation Silver Lake’s current bid may still be a superior one, despite the disapproval that such a determination would be met with by some of Dell’s shareholders.
If the Delaware courts allow the Dell board sufficient leeway, they could reject Icahn's bid on the perfectly reasonable grounds that it would leave Dell overly leveraged and thus put shareholders at risk of firm failure.
Alternatively, perhaps the Delaware courts will finally embrace my argument that Revlon is about conflicts of interest and entrenchment motives. If Dell's independent board members continue to embrace a best practice approach, demonstrating that they are not trying to entrench themselves--or, more important, Michael Dell--in office, there is no good reason for Delaware to apply Revlon in a formalistic way that requires Dell to sell to Icahn.
