Published July 08, 2013
Despite speculation to the contrary, an influential investor-advisory firm threw its weight behind Michael Dell’s proposed $24.4 billion buyout of Dell (DELL) on Monday due in part to the PC maker’s rapidly deteriorating financial prospects.
The key support from Institutional Shareholders Services as well as two other investor-advisory firms comes at a crucial point for the Michael Dell and Silver Lake Partners group, which had appeared to be losing momentum to an alternative proposal from billionaire Carl Icahn ahead of a July 18 shareholder vote.
While Icahn and other shareholders have complained Michael Dell’s $13.65-a-share bid is too low and would allow the buyout group to hog all of the financial benefits of a turnaround, ISS noted Dell’s significantly dimmed outlook amid the PC slowdown.
“The risk may be less that he’s taking all the upside for himself than that he is trying to catch a falling knife," ISS wrote in the report. "If your CEO is willing to buy your falling knife for the privilege of catching it, there is probably a price at which you should let him."
In addition to a 79% year-over-year plunge in first-quarter profits at Dell, ISS pointed to other cautionary signs, including the decision by private-equity firm Blackstone (BX) to abandon a possible buyout offer of its own due to the company’s financial struggles.
“The certainty of value provided by the all-cash consideration, and the fact that the transaction would transfer to the buyout group the risk of the deteriorating PC business and the company's on-going business transformation, a vote FOR the transaction is warranted,” ISS said.
ISS also raised concerns about whether or not Icahn’s proposal for Dell to launch a tender offer for about 1.1 billion shares at $14 each would actually occur if the Silver Lake deal is rejected.
The Icahn proposal is “only one vision of what that alternative, still publicly-traded Dell might look like” due to the uncertainty surrounding the transaction, ISS said.
In addition to ISS, investor-advisory firms Egan-Jones and Glass, Lewis & Co. also backed the Michael Dell proposal on Monday.
"In light of the ongoing challenges facing the company, the risks of going forward on a stand-alone basis, and the uncertainties of alternative proposals, despite the continued discontent of a number of large, long-term shareholders, we believe the proposed all-cash buyout is the best alternative for unaffiliated shareholders at this time," Glass, Lewis wrote in the report.
Glass, Lewis also said the lingering shareholder dissatisfaction may prompt Michael Dell to boost his bid, but said more likely the buying group will "continue to hold their ground on price just as they have for months."
The support comes after reports surfaced last week indicating the most closely-watched of the investor-advisory firms had deep skepticism about the Michael Dell leveraged buyout and was leaning against backing the transaction.
Also last week, Michael Dell and Silver Lake reportedly ruled out a sweetened bid for Dell because they believe their offer reflects a fair and significant premium of where the stock would trade if the deal collapsed.
“We are pleased that ISS has recommended, as we have, that Dell shareholders approve the $13.65 per share cash sale transaction,” the special committee running Dell’s buyout process said in a statement. “Given the company's business challenges, intensifying competition and deteriorating industry trends, a sale at $13.65 per share in cash provides the highest value and greatest certainty of any available alternative.”
Underscoring the importance of the ISS support, shares of Round Rock, Tex.-based Dell rallied 3.11% to $13.44 on Monday.