the strange struggle for control of Dell Inc. (DELL)

the emphasis is on strange

I’m not a DELL fan and haven’t been for a long time.  I’m relieved to not be in the position of having to decide what to do with my DELL shares, since I don’t own any.

The control struggle, so far:

Michael Dell, the founder and holder of 16% of the equity, thinks he–and his partner, Silver Lake Management–can breathe life back into the husk of a once-powerful company.  Their price for doing so, however, is all of the upside.

They are being opposed by investment manager Southeastern Asset Management, which had accumulated a large position in DELL (apparently at higher cost) and by corporate buccaneer Carl Icahn.  These two appear to believe that DELL is a treasure trove of undervalued assets that would be worth significantly more than today’s share price either under better management or in an orderly sale.  They balk at both the Michael Dell description of the DELL malady and the price of the cure.

I don’t have an opinion.  My hunch is that technological change and Asian competition have undermined the DELL edifice much more than Southeastern thinks.  I’m not persuaded by Southeastern’s published valuation.  But I haven’t done the work that might back up my hunch  with facts.

The strange stuff?   …two things:

1.  ISS

ISS is a proxy voting advisory firm.  It exists, in my view, mostly because the Federal government requires investment managers to cast votes for all the shares that they have in their portfolios for all corporate actions–and to do so in a way that benefits their clients best.

If management companies made the needed voting decisions in-house, they’d have to hire staff.  No matter what they did, they’d still run the risk of second-guessing by Washington.  So, they’ve outsourced the job to third-party firms like ISS, who collect data, analyze and make voting recommendations.  This saves mutual fund and pension managers time and money.  And ISS deflects potential blame from them   …sort of like an insurance policy.

In this case, ISS is recommending that clients vote in favor of the Michael Dell buyout proposal.

The strange thing is that, if the New York Times is to be believed, ISS’s rationale is that, like me, it’s skeptical that the Dell ship can be righted.  The Times quotes ISS as making the oh-so-British analogy that Michael Dell’s bid to buy DELL may be akin to “trying to catch a falling knife.”  In other words, it’s a bad idea and one where he’s likely only to hurt himself.  (For fans of British equity research prose, he may also be viewed as in the process of “grasping a poisoned chalice”, thinking it’s “a nettle.”)

For ISS, $13.65 a share is at or above the point where there’s any reward to holders for accepting the risks of a failed turnaround.

My translation: ISS thinks both buyout groups are crazy.

2.  failed proxy solicitation

DELL’s board of directors has approved the Dell/Silver Lake bid and called for a shareholder vote on it.

Two ground rules agreed to by all parties:

–Mr. Dell’s stock doesn’t get a vote, and

–any shares that don’t cast a ballot will be counted as voting “no.”

No big deal, I thought.  Institutions will vote the way ISS says.  And individuals always enthusiastically back anything that management recommends, no matter how loony or contrary to their interests it may be.

But no!!!!!!

In this case, individuals are resisting the blandishments of proxy solicitation firms (who call you up at dinnertime, plead their case and take your vote, then and there) in a way they never do, and are declining to vote.

Mr. Dell has asked to have the vote tally postponed   …twice.  There’s no reason to do so other than that he doesn’t have enough votes to win.  And now he’s telling the board he’ll toss in another $.10 a share if they change the rules so that non-voting shares aren’t counted as doing anything.

It’s hard to see what individuals gain by not voting.  It may be that they find it too hard to decide and have opted to take whatever fate brings them–although, as I mentioned earlier, generally individuals never have trouble backing management.  My hunch is that most holders have a loss and find it too difficult psychologically to take an action that will cause that loss to be realized.


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