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Carl Icahn: If You Like This Dell Buyout, Why Not Vote Against It?

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I've made fun of Carl Icahn's involvement in Dell a few times, because it has been pretty nutty and half-baked, but I hope that doesn't obscure my fundamental fondness for the man. I sometimes think that we're a lot alike: we both come to work every day with the goal of being amused by the financial world. He has billions of dollars, though, so he can create his own amusements. But then they become my amusements too, and I'm grateful.

Anyway this is pretty cute:

Dear Fellow Dell Stockholders:

We are in the process of perfecting our right to seek appraisal of our Dell shares and we believe that you should also perfect your appraisal rights. Under Delaware law if a merger occurs and you did not vote for it, you are entitled, through appraisal, to the fair value of your shares as determined by a Delaware court. We have done a great deal of due diligence concerning the value of Dell, and as we have said in the past, we believe the $13.65 merger price substantially undervalues your Dell shares, and we believe if you seek appraisal, you will receive more. BUT WHAT IS MOST IMPORTANT ABOUT SEEKING APPRAISAL IS THAT YOU CAN CHANGE YOUR MIND ABOUT APPRAISAL UP TO 60 DAYS AFTER THE MERGER AND STILL TAKE THE $13.65 PER SHARE. During the "free 60 day period" we believe Dell may wish to negotiate with those that sought appraisal and possibly pay a premium over $13.65 to get them to settle and drop their appraisal claims, as explained below. To add a new twist to an old saying, "you can have your cake and eat it too".

What is he up to? The - sorry - game theory is wonderful. Thing one: do you agree with Icahn that, if there's a significant demand for appraisal, Silver Lake would want to settle for more than $13.65 within 60 days? Here is Icahn's rationale:

In many merger transactions, if over a certain number of stockholders seek appraisal rights, this gives the purchaser the right to opt out of the transaction and thereby avoid the uncertainty created by appraisal. However, Michael Dell and Silver Lake did not obtain this opt out right. This leaves Michael Dell and Silver Lake VERY exposed. ... We would certainly like to be present to hear the discussion between Michael Dell/Silver Lake and their lenders as they consider the impact of a substantial exercise by stockholders of their appraisal rights. Will the lenders use this as an excuse to refuse to close claiming this is a material adverse change, especially in light of the terrible time Dell is having in the PC market as so often stated by Dell themselves? We think that there is a good chance that none of them will want to face the overhang of a large number of stockholders seeking appraisal. I therefore believe there will be significant pressure on Michael Dell and Silver Lake to resolve the appraisal rights, and possibly seek a settlement during the "free 60 day period".

Ehhhhhh. I'd be pretty surprised if "a lot of people seek appraisal" is a MAC in Silver Lake's financing documents,1 or that the lenders would refuse to close because of it. Of course Silver Lake and Michael Dell would be exposed to the risk that an appraisal on a large chunk of shares would produce a significantly higher value, requiring them to pay out lots of money and further reducing their already sort of meh projected returns, so they might for that reason want to settle quickly just to limit their risk.

On the other hand, by this point they've become very proficient at arguing about how terrible Dell is, so they might view an appraisal lawsuit as an opportunity to renegotiate a portion of the deal. Appraisal, after all, can lead to a lower price as well as a higher one. If 30% of Dell's public shares - some 450mm2 - seek appraisal, and Silver Lake and Michael Dell can convince the court that Dell is worth even $13.52 - the price that Southeastern got for its shares from Carl Icahn - or $13.36 - the price at which Michael Dell is rolling his own shares into the new company - then they're saving around $60-$130mm. Enough to pay for their lawyers, anyway. If they can convince the court that Dell is worth $7.71 per share - the price they argue is implied by Street earnings estimates and pre-merger P/Es - then they'd save $2.7 billion, or more than their entire equity check for the deal. I wouldn't hold my breath for that result, but I'm also not sure that an appraisal lawsuit is a negative-expected-value proposition for Dell and Silver Lake.3

But who cares, what's the worst that can happen? You can perfect your appraisal rights, vote against the deal, and entrust yourself to Carl Icahn's negotiating prowess for 60 days. If he can get Dell/Silver Lake to offer more money in those 60 days, you take it. If not, you drop your appraisal claim and take the $13.65.4 What could possibly go wrong? Icahn:

Even if you want the Michael Dell/Silver Lake offer to be accepted, unless you believe your shares will tip the balance, why vote for it? Why not seek appraisal and have the benefit of the "free 60 day period"?

And, I mean, what are the chances that your shares will tip the balance? Not zero, anyway. Here is DealBook:

Despite winning the support of influential proxy advisers like Institutional Shareholder Services, advisers to the buyers and to a special committee of Dell’s board are still concerned that they may lose the July 18 vote on the deal. While Mr. Icahn may have lost some negotiating leverage with the I.S.S. report, those people believe that the activist may still succeed in stirring up enough opposition with the promise of his buyback proposal.

Wednesday’s announcement [about appraisal rights] appears to signal that Mr. Icahn may be backing away from that plan.

Does it? Here's what I read Icahn to be saying:

  • If you like Michael Dell's buyout, and think my pseudo-levered-recap is bogus: no problem, I respect that.
  • But even so, what you should do is take a free 60-day option to get more than Michael Dell is offering.
  • If you do that, I will bring my high-pressure blustery negotiating style to bear on Michael Dell and Silver Lake, to try to get you a bump in the deal price.
  • But win or lose, that option is totally free! At the end of 60 days, if I can't get more money on the table, you can take the $13.65. No half-baked tender offers, no worries about my financing, nothing. Just the buyout at $13.65, or the same buyout at a higher price.
  • All you have to do is vote against the buyout.

Does this mean that Icahn has dropped his recap plan? Or is it just a crafty way to get shareholders to vote against the buyout, even if they want the buyout? Because that option is only free if fewer than 50% of shareholders take it: if they all want the Icahn-led appraisal process, then no one gets it. They get: no deal. And then what?5 And then Icahn's proxy fight and tender offer, perhaps?

Icahn Moving To Perfect Appraisal Rights Of Dell Shares; Urges Other Dell Stockholders To Act Now To Do The Same [PRN]
Icahn’s Latest Gamble at Dell: Appraisal Rights [DealBook]

1.Financing MACs tend to track the underlying M&A MACs, for obvious reasons; here is the relevant portion of Dell's merger agreement MAC:

“Company Material Adverse Effect” means any fact, circumstance, change, event, occurrence or effect that would, or would reasonably be expected to, (1) have a material adverse effect on the financial condition, business, properties, assets, liabilities or results of operations of the Company and its Subsidiaries taken as a whole; provided that for purposes of this clause (1), none of the following, and no fact, circumstance, change, event, occurrence or effect to the extent arising out of or relating to the following, shall constitute or be taken into account in determining whether a “Company Material Adverse Effect” has occurred or may, would or could occur: ... (ii) any facts, circumstances, changes, events, occurrences or effects arising out of, resulting from or attributable to (A) changes or prospective changes in Law, applicable regulations of any Governmental Entity, generally accepted accounting principles or accounting standards, or any changes or prospective changes in, or issuance of any administrative or judicial notice, decision or other guidance with respect to, the interpretation or enforcement of any of the foregoing, (B) the negotiation, execution, announcement, pendency or performance of this Agreement or the consummation of the Merger or the other transactions contemplated by this Agreement (other than compliance with Section 5.1(a)), including the impact thereof on relationships, contractual or otherwise, with customers, suppliers, distributors, partners, employees or regulators, or any litigation relating to this Agreement, the Merger or the other transactions contemplated by this Agreement or compliance by the Company with the terms of this Agreement, ....

So the merger and related litigation can't cause a MAC.

2.There are around 1.7bn shares outstanding, of which Michael Dell owns 244mm, leaving around 1.5bn public shares.

3.That's not even counting the value of messing with Carl Icahn.

4.Obvs if this is the thought process why would Dell/Silver Lake settle? Just wait and it'll go away. I'd offer to settle for $13.64, if I were them.

5.I mean, you could always run the vote again: if the deal is narrowly voted down because everyone wants appraisal, then you have another shareholder meeting and say "no really this time, you gotta vote for the deal." But Silver Lake and Michael Dell don't have to do that: they could walk if the shareholders say no. If I were them I'd say "fine, we can vote again, but now the price is $13.50." But that's easy for me to say, here in a footnote. They probably actually want to buy Dell for some reason.