Big Dell Investor Plans To Fight Leveraged Buyout

One of the Dell's biggest institutional shareholders, with 8.5 percent of outstanding shares, plans to fight the proposed $24.4 billion leverage buyout of the company by equity firm Silver Lake Partners, Michael Dell and other financing partners.

Southeastern Asset Management, based in Memphis, Tenn., penned a six-page open letter to Dell's board of directors expressing "extreme disappointment" regarding the move to take Dell private because the firm believes the deal, for $13.65 per share, grossly undervalues the company. The letter was signed by Southeastern Capital Management chairman and CEO O. Mason Hawkins and President and Chief Investment Officer G. Staley Cates.

"We retain and intend to avail ourselves of all options at our disposal to oppose the proposed transaction, including but not limited to a proxy fight, litigation claims and any available Delaware statutory appraisal rights," the firm wrote in the letter.

[Related: 10 Unanswered Questions Surrounding Dell's Leveraged Buyout ]

Southeastern Asset Management will vote against the current buyout proposal, the company said.

"We would have endorsed a transformative transaction that would have provided full and fair value to Dell's public shareholders, including a leveraged recapitalization or a go-private type sale where current shareholders could elect to continue to participate in a new company with a public stub," the letter said. "Unfortunately, the proposed Silver Lake transaction falls significantly short of that, and instead appears to be an effort to acquire Dell at a substantial discount to intrinsic value at the expense of public shareholders."

Southeastern Asset Management conducted its own analysis of the company's perceived worth and calculated that Dell Financial Services and the company's multiple acquisitions over the last couple of years are worth $12.94 per share, without including the legacy PC or server businesses.

"The current bid therefore places a value of less than $1.00 per share on the remainder of the Company. By any objective measure, that is woefully inadequate," the firm wrote in the letter, which was addressed to Lawrence Tu, Dell's senior vice president, general counsel and secretary.

Southeastern Asset Management calculated that the x86 server business is worth $8 billion or $4.4 per share, excluding the SonicWall, Wyse and Quest Software acquisitions. The firm tags the services business not captured in recent acquisitions at $7 billion or $3.89 per share. The PC business should be worth about $5 billion or $2.78 per share, and the software and peripherals business should add another $1.67 per share at a worth of $3 billion, according to the firm.

NEXT: Dell Defends Decision

In total, Southeastern Asset Management believes Dell should be worth close to $24 per share and proposes a leveraged recapitalization to reward shareholders with a special dividend.

"As opposed to forcing shareholders out at $13.65, this option would have allowed all shareholders to receive a large cash payment while retaining ownership of significant future cash flow streams. The revenue mix of Dell's business has changed as a result of strategic acquisitions, resulting in the fact that roughly half of the annual free cash flow generated comes from higher growth enterprise businesses while the other half comes from legacy businesses linked to the PC," the company wrote in the letter.

Southeastern Asset Management believes there is significant opposition from other shareholders to force Dell to reconsider other alternatives.

"We are confident our fellow shareholders are as disappointed as we are with the proposed $13.65 per share price, and the company could pursue such alternatives when the non-conflicted shareholders ultimately vote against the proposed transaction," the firm wrote.

Southeastern Asset Management is not the only investor to express displeasure in the deal, but it might be the largest.

Meanwhile, Dell countered in a filing with the SEC Monday by defending its decision to seek a buyout with Silver Lake Partners and said it considered an array of strategic alternatives before selecting the $24.4 billion deal.

"The board concluded that the proposed all-cash transaction is in the best interests of stockholders. The transaction offers an attractive and immediate premium for stockholders and shifts the risks facing the business to the buyer group," according to the filing. "In addition, and importantly, the go-shop process provides stockholders an opportunity to determine if there are alternatives that are superior to the present offer."

PUBLISHED FEB. 11, 2013