Dell Inc. (DELL) described bleak prospects for its business and
the personal computer industry as it laid out its most
comprehensive case for accepting a $24.4 billion offer to go
private, a decision that kicked off a high-stakes poker game
between potential bidders for the computer maker.
In a 274-page filing Friday with the Securities and Exchange
Commission, numerous people involved in the deal--from Dell's own
financial chief to those financing the deal--said the tech giant
was increasingly fighting for market share in an industry that
appeared in a downward spiral.
They argued that Dell would need a dramatic remake, a prospect
that justified the $13.65-a-share go-private offer last month from
private-equity firm Silver Lake Partners and Dell founder and Chief
Executive Michael Dell.
Mr. Dell is in the unusual position of having a potential
interest in talking down Dell's prospects in order to convince
shareholders to take the current bid that he helped put together.
Some major investors oppose the deal, believing the company is
worth more.
In the proxy, Dell outlines how it missed even its own internal
revenue projections for each of its prior seven quarters.
As an indication of how rapidly management believed Dell's
prospects were eroding, Dell's projections for revenue for the
current fiscal year fell by as much as 15% between July 2012 and
January 2013, from an initial projection of $66 billion to a
"conservative" case projection of $56 billion. The Boston
Consulting Group, which was hired by the board to analyze the
buyout offer, projected that Dell's revenue would decline each year
through 2016.
Numerous times, various parties involved in the deal cited
weaker-than-expected customer demand, reductions in PC shipments
and falling gross margins, according to the filing.
Mr. Dell told the board that the only way out involved changes
in Dell's business model and expensive investment in new products
and services. "Implementing such initiatives would require
additional investments that could weaken earnings and cause greater
volatility in the performance of the Common Stock," the filing said
Mr. Dell argued in a Dec. 6 meeting.
"Mr. Dell stated his belief that such initiatives, if undertaken
as a public company, would be poorly received by the stock market
because they would reduce near-term profitability, raise operating
expenses and capital expenditures, and involve significant
risk."
There were also questions as to whether Dell was being run
correctly, including discussion in at a Sept. 13 meeting that
included "adjustments in the management team," the filing
states.
Alex Mandl, chairman of a special committee of the company's
board tasked with overseeing the deal negotiations, at one point
inquired about Mr. Dell's plans if the deal didn't go through. On
Jan. 17, the proxy said, Mr. Mandl "expressed the view that the
Company may need to hire a chief operating officer and asked Mr.
Dell about his plans in the event a going private transaction did
not occur," the proxy said.
The filing comes at a critical juncture as the company attempts
to convince shareholders to approve the proposed $24.4 billion
buyout. Dell shareholders including its biggest outside investor,
Southeastern Asset Management Inc., have criticized the Silver
Lake-Mr. Dell bid--which was at about a 25% premium to Dell's stock
price at the time--as undervaluing the company.
On Monday after the 45-day "go-shop" period to weigh if any
other bids might come in ended, Dell announced that private-equity
firm Blackstone Group LP (BX) and activist investor Carl Icahn told
a Dell special committee that they were also interested in the
computer maker.
While both have yet to submit formal bids for Dell, Blackstone
has said it would offer in excess of $14.25 a share while Mr. Icahn
proposed paying $15 per share for up to 58% of the company's
shares. Both competing proposals would let investors retain some or
all of their stakes.
Any competing offers put Mr. Dell--who with affiliated entities
owns 16% of the company--in an awkward position. Blackstone has
reached out to other executives to potentially lead Dell, people
familiar with the matter have said, meaning Mr. Dell may wind up on
the sidelines without a say in the company he founded out of his
dorm room in 1984. People familiar with the situation have also
said Blackstone is open to keeping Mr. Dell as CEO if it wins a
bid.
At the same time, Mr. Dell would be enriched by any higher bid
given the size of his stake in the company.
The computer maker has previously said little about the buyout,
beyond that it would give Dell shareholders "immediate value" while
allowing management more "time, investment and patience" to steer
changes. The company also said it plans to reduce spending by $2
billion, though it hasn't said how.
In regulatory filings since the deal was made public, Dell
executives have also been quoted saying that while the computer
giant had considered spinoffs or selling itself piecemeal, it
decided to remain one entity. Either way, the company said it
believes its effort to go private won't adversely affect its
customers or employees.
Mr. Dell's discussions with Silver Lake Partners began in July
2012 and intensified a month later before he brought word to his
board of directors that he was interested in a management buyout,
according to the filing.
It was that summer, after Mr. Dell had talked with Southeastern
and with another private-equity firm, that Mr. Dell approached Mr.
Mandl, the company's lead director, about going private.
The discussions kicked off seven months of back and forth that
saw two private-equity firms drop out of a bidding process and
Silver Lake boost its bid six times before reaching a deal the day
after the Super Bowl.
Dell's filing lays out the board's internal conflict with
disappointing results and how it sought to persuade Silver Lake to
continue adding to its bid. At one point in late January, after
word of deal talks had been reported in the press, Silver Lake and
Mr. Mandl both threatened to leave the negotiating table. Mr. Mandl
told Mr. Dell he was "pessimistic" about Silver Lake's negotiations
and urged him to start thinking about hiring new executives and
think about his own role at the company.
Mr. Mandl told Mr. Dell the board needed a price of at least
$13.75 a share and Silver Lake came back with $13.25, which was
immediately rejected. It took three more offers, and Mr. Dell's
promise to accept a discount on his own 14% ownership, to get to
the agreed-upon $13.65 deal.
The filing also underlined the extent of Dell's business woes.
Once the largest computer maker in the world, Dell has struggled as
PCs--its bread-and-butter product that generates half of its annual
revenue--has declined amid the rise of smartphones and tablets and
continued competition from rivals including Lenovo Group Ltd.
(LNVGY).
Since 2009, the computer maker has also spent an estimated $11.4
billion to buy 18 companies in areas such as tech storage and
services as it sought to remake itself as a one-stop shop for
corporate customers. But those businesses haven't grown quickly
enough to offset losses in its core PC business. The filing said
that BCG concluded the acquisitions "had thus far yielded lower
returns relative to their expected returns."
(Sharon Terlep contributed to this article.)
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