I feel like it would be a useful, or at least entertaining, exercise to require every company, once a year or so, to give a presentation to its shareholders that is like "here's why you should vote for an LBO of our company at a ~2% premium to the current stock price." Even if there's not an LBO in the offing, I mean; just as rhetorical practice. Like Buffett's tame bear. Anyway Dell, which does have an LBO in the offing, filed its presentation today and it's 39 pages of "boy do we suck":
High fives all around, boys! Or take this slide:1
"Hey, let's make a slide evaluating our performance that consists primarily of a bunch of big red down arrows," is something that public company boards don't say often enough.2
After setting the stage with a healthy dose of "your company is dogshit," Dell's board moves on to argue that shareholders should vote for the deal as it's better than the alternatives of (1) a leveraged recap or (2) the abyss. The second point is easy to make; turns out that companies who vote down buyouts in the hopes that something better (better bid or viable independent business plan) will come along tend to be disappointed, um, 7 times out of 9, roughly.3
The first point is bolstered by the fact that there is a leveraged recap plan on the table, and by the fact that it's absurd. Is anyone surprised to learn that Carl Icahn's leveraged recap proposal, in addition to being unfinanced and pretty sketchy, also doesn't add up? I mean, basically every time he's written to Dell he's made an arithmetic error.
This one is less an error of arithmetic than it is of understating costs; Icahn's sources and uses seems to have mis-calculated the breakup fee that Dell would owe to Silver Lake, missed an upcoming debt maturity, and understated the need for cash on hand. So Dell thinks that Icahn's proposal could fund, not the $12 special dividend he expects, but only $8.50.4 So shareholders would need to get $5.15 worth of value from their shares to break even with the Silver Lake LBO proposal, or a 4.2-5.4x EBITDA multiple, versus Dell's 3.3x unaffected multiple.
There are other, more general, arguments against the leveraged recap too - that it would significantly increase risk due to declining income, and that employees and customers might react poorly - that you may or may not find compelling. But all in all I get the impression that Icahn has inadvertently helped Dell's and Silver Lake's case for the LBO with his weird shifting half-baked proposals. My initial reaction to the Dell proxy, with its record of the board's deliberations, was that the board dismissed the idea of a large leveraged recap surprisingly quickly. It might be useful for Dell shareholders to have a carefully considered, financed, and fully fleshed out recap proposal to evaluate as an alternative to the LBO. Icahn does not seem capable of providing that, meaning that he's basically helping Dell's board to argue against a straw man of a leveraged recap. Of course, nothing in their track record suggests that the board and management would be capable, either.
1.Other lowlights include: Dell being in the wrong lines of business ...
... and making less money each year than the year before:
2.There's a school of thought among investment bankers that you're not allowed to use red for any graphical element in a pitch, because it scares clients. I have my doubts as to whether clients are that easily scared but it is hard to find a lot of red in most banks' color schemes. Anyway HUGE RED DOWN ARROWS are right out.
3.I have made no effort to check the comprehensiveness of this data set but surely some enterprising analyst at Icahn's investment bank should; seems like something that could be fudged intentionally or otherwise. (Wait, does he have an investment bank for this?)
4.Their slide adds, with more restraint than I might be able to muster, that that "Assumes funding from uncommitted bridge loan ($5.2bn)":