Southeastern Asset Management told the board of directors of Dell Inc. (NASDAQ:DELL) that it will vote against the proposed deal to buy out all of the outstanding shares of the company for $13.65 per share or $24.4 billion.
Mason Hawkins, chairman and CEO of Southeastern Asset Management, wrote in his letter that he was “extremely disappointed” with Dell's agreement, citing that it “grossly undervalues” the company. According to him, the timing of the bid was “opportunistic” and denied public shareholders the ability to take part in substantial value creation for the company in the future.
Hawkins urged the board of directors of the computer maker to carefully review all alternatives to the proposal of the consortium of buyers including Silver Lake Partners, MSD Capital, Microsoft Corporation (NASDAQ:MSFT), and its CEO, Michael Dell, to provide maximum value to shareholders. He emphasized that the consortium’s deal “appears to be an effort to acquire Dell at a substantial discount to intrinsic value at the expense of public shareholders.”
Based on the estimate of Southeastern Asset Management, Dell Inc. (NASDAQ:DELL)'s valuation should be around $24 per share. Based on its filing with the Securities and Exchange Commission (SEC), Dell’s valuation is as follows: net cash ($3.64), Dell Financial Services (DFS) ($1.72), acquisitions since 2008 ($7.58), server business ($4.44), support and deployment ($3.89), PC business ($2.78), software & peripheral ($1.67), unallocated expenses (-$1.00), and DFS value embedded in segments ($1.00). According to the investment management, its estimate does not even include Dell’s strength in product distribution, particularly in the small to medium size business (SMB).
Hawkins pointed out the Dell’s rivals including Hewlett-Packard Company (NYSE:HPQ), International Business Machines Corp. (NYSE:IBM), Oracle Corporation (NASDAQ:ORCL), and Cisco Systems, Inc. (NASDAQ:CSCO), do not have equivalent strength in SMB. He noted, “This competitive advantage should enable Dell to continue to be able to sell its portfolio of enterprise solutions and services to a growing SMB market.”
According to Hawkins, instead of approving the proposed bid of the consortium, the board of directors of Dell Inc. (NASDAQ:DELL) could have implemented a leveraged recapitalization as an alternative that would facilitate special dividend payment to shareholder. He said a leveraged recapitalization provides a large cash dividend payment (approximately $12 per share) to shareholders and retains ownership with future significant cash flow streams.
A second alternative discussed by Mason Hawkins in his letter was called a 'Dutch auction', or any type of recapitalization that would allow shareholders offer certain number of shares for cash based on a price or range of prices.
“We reiterate our opposition to the proposed Silver Lake transaction and have serious concerns about the Board of Director’s approval, which penalizes shareholders by forcing them to exit at a significant discount to intrinsic value rather than adopting alternatives such as a recapitalization that would have better rewarded shareholders. We expect the Board of Directors to satisfy its fiduciary obligations to all shareholders and to consider superior alternatives that treat public shareholders fairly,” said Hawkins.
Meanwhile, a related report from Reuters cited that some of the shareholders of Dell Inc. (NASDAQ:DELL) including Harris Associates LP, Donald Yacktman's Yacktman Asset Management LP, and Pzena Investment Management would also vote against the $24.4 billion buyout. However, bar Southeastern Asset Management, the firms have relatively small stakes in Dell, which would mean that they would need to aggressively court other shareholders to oppose the buyout.