Dell SEC filing highlights bleak outlook that led to buyout plan

Southeastern, now a critic of the deal, first approached Michael Dell about a buyout plan

In a filing to the U.S. Securities and Exchange Commission on Friday, Dell highlighted the dismal financial straits that led to its plan to take the company private, a move that now has some major shareholders in an uproar.

Ironically, the filing reveals that the idea of going private was first broached to CEO Michael Dell by Southeastern Asset Management, the largest independent shareholder outside of Michael Dell, which has emerged as one of the biggest opponents to the deal as it was formulated in a Feb. 5 announcement.

Southeastern, which first approached Michael Dell about the idea last June, was shunted aside in the maneuvering leading up to the announcement of the deal. It has blasted the plan backed by investment firm Silver Lake Partners as undervaluing the company.

The Friday filing details the events that led up to the announcement that Michael Dell is teaming up with Silver Lake to buy the company, offering US$13.65 per share. The deal is being financed through cash and equity contributed by Dell, cash from investors affiliated with Silver Lake, cash from MSD Capital, L.P., a $2 billion loan from Microsoft, rollover of existing debt and debt financing from BofA Merrill Lynch, Barclays, Credit Suisse and RBC Capital Markets.

Dell is betting that as a private company operating outside the scrutiny of Wall Street, it will be better able to execute its strategy to push into high-margin products and services.

Dell earlier this week confirmed that it has received two counter-offers related to its plans to go private, with rival bids coming in from private equity fund manager Blackstone and entities associated with investor Carl Icahn. The offers came during a "go shop" period that took place after the February announcement, during which a special committee of the company charged with overseeing the transaction reviewed competing bids.

The filing Friday included a preliminary proxy statement for shareholders to review before a vote that is likely to take place at the end of the second quarter or the beginning of the third quarter. The Dell special committee urged shareholders to review the contents, and continued to back the announced Feb. 5 proposal.

"The current Silver Lake and Michael Dell transaction delivers $13.65 per share in cash -- a 37% premium to Dell's 90-day average price and a 25% premium to the unaffected price prior to reports in the media about the proposed deal," the Dell special committee said in a statement Friday. "We believe that this significant, immediate and certain premium offers superior value to owning Dell as a stand-alone entity today."

The special committee said it will continue discussions with Blackstone and Icahn, however. "We intend to work diligently with both of them to assist them in their respective due diligence reviews of the company and to seek definitive proposals that would constitute a superior proposal to the current Silver Lake and Michael Dell transaction," the committee said. "Michael Dell has confirmed his willingness to explore participating in alternative acquisition proposals. However, there can be no assurance that either non-binding alternative acquisition proposal will ultimately lead to a superior proposal. "

Blackstone's offer would give shareholders the choice of receiving either all cash or stock, with each being valued "in excess of $14.25 per share," according to a Dell statement. Dell would also continue to be traded on the NASDAQ exchange. Icahn's group would acquire up to 58 percent of Dell's outstanding shares, offering $15 per share up to an aggregate of more than $15 billion in cash. Icahn Enterprises now owns 80 million shares of Dell.

Michael Dell first approached the Dell board with the idea of going private last August, about two months after Southeastern approached him, according to Dell's latest SEC filing. The special committee was formed to analyze and oversee the plan, and examined proposals by Silver Lake, investment firm KKR -- which may have included Southeastern in its plan -- and a third investment firm unnamed in the filing.

KKR and the third investment firm dropped out. KKR's "decision was driven largely by the fact that its investment committee was not able to get comfortable with the risks to the company associated with the uncertain PC market, and the concerns of industry analysts," according to Dell's filing.

Southeastern itself put in a counterbid to Silver Lake, but Silver Lake won out when Michael Dell agreed to roll his own shares into the deal at a discounted $13.26 per share, allowing Silver Lake to come up with a bid acceptable to the special committee, according to the filing.

The Dell filing outlined the poor financial picture that the special committee faced as it deliberated whether to agree to take the company private. For example, in August "primarily as a result of continued weakness" in the EUC (end-user computing) business, the company reported revenue for the second quarter of fiscal year 2013 of $14.5 billion, the filing noted. Dell's revenue for this quarter was approximately $300 million less than the amount projected by management for the quarter, and about $800 million less than a prior forecast management had made.

"The Company lowered its fiscal year 2013 earnings per share guidance from $2.13 to $1.70 and attributed the lowered outlook to the uncertain economic environment, competitive dynamics and the decline in demand in the EUC business," the filing noted.

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