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Prediction: Tomorrow Bill Ackman Will Announce That Dell Is A Pyramid Scheme

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In a Black-Scholes world you wouldn't have long tediousarguments about whether an LBO represents a good deal for shareholders. You think Dell is undervalued at $13.65 a share? Hey that's super. Pay $13.66 for 51% of the shares and vote the deal down.1 The end. There's a certain class of debates that can be reduced to just making a market and putting your money on it, and that class is probably much larger than the class of debates that actually get resolved that way.

But LBO value disputes mostly aren't in it, because in real life the financing and friction-cost and legal and other obstacles to accumulating 51% of a big public company are daunting. Southeastern Asset Management, which thinks $13.65 is an insulting lowball offer for Dell, has awkwardly been selling shares for less. We mostly don't live in a Black-Scholes world. But maybe Carl Icahn does? That is one hypothesis. Another is that Carl Icahn reads the paper every day and is like "oh, a situation is in the news, let me come in and fuck about with it for a while." Tomorrow we'll read he's accumulated an 8% stake in the sequester.


Trading sources said they were confident that Icahn had amassed a position in Dell that may approach 100 million shares, and would bring him to a roughly 6 percent ownership. Icahn is expected to file a 13D on Dell very soon and purchased his shares over the last two weeks as Dell's stock has traded near $14. ...

Advisors to the special committee asked Icahn to sign a confidentiality agreement and join the go-shop process now being conducted by the special committee, but has yet to do so.

What is more likely is that Icahn will come out against the deal and argue in favor of Dell levering up its balance sheet to pay shareholders a significant one time dividend. That is the plan being espoused by Dell shareholder Southeastern Asset Management, which holds 8.4 percent of the company and is actively trying to organize shareholders to vote the deal down.

Dan Primack is unimpressed by the levered recap idea, mostly because it leaves you with Michael Dell as a surly disgruntled CEO of a riskier public company,2 and is otherwise at a loss to explain what Icahn is thinking. Icahn has been buying well above the deal price, so using his position as leverage to push up that price seems risky, and trying to force his way into being a minority investor in the buyout is not really part of Icahn's M.O.

For myself, I've long since given up on trying to figure out Icahn's mind, though I note that the Journal is reporting that Southeastern is considering its own bid for Dell and Icahn is a natural partner. Southeastern is not exactly perfectly set up to make a market on this LBO: it can sell easily enough, but it's not really in the business of buying whole companies with its public mutual fund.

But Carl Icahn is? I mean, not Dell, but companies. Even more than that, he's carved a bit of a niche for himself in the business of using his capital to tide companies over through awkward patches until he can get them sold. Sometimes that works (Hallwood Realty!), sometimes it doesn't (CVR Energy?), but a big part of his business model is using his capital to buy enough of a company - preferably one that's in the news already - to get some control over how and when and at what price it's sold to someone else.

In other words he's basically a market-maker in companies. When they're selling too low he steps in to provide liquidity. And then he tries to get them off his books and capture the bid-ask. I ... I confess I do not understand how the mechanics of that will work out here? Sell to H-P? Sell to Blackstone? Sell to Silver Lake for $15? Levered recap something something? It's a bit perplexing. But given how complainy Dell's shareholders are, there sure seems to be demand for Icahn's services. So how could he resist?

Carl Icahn Takes Up to a 6 Percent Stake in Dell [CNBC]
Icahn Said Ready to Oppose Dell Deal [DealBook]
What is Icahn up to with Dell? [Fortune]
H-P, Southeastern Have Mulled Dell Bids [WSJ]
Dell Said to Draw Interest From Blackstone to Lenovo [Bloomberg]

1.What they won't sell to you for $13.66? Then they must think it's undervalued at $13.65 too, and should be on your side for the vote. EFFICIENT MARKETS BABY.

2.Does it? I mean you could fire him, or he could quit, no? You could still keep the name I think.