MEMPHIS, Tenn., April 9, 2013 /PRNewswire/ -- Southeastern Asset
Management, Inc., the largest outside shareholder of Dell Inc.
(NASDAQ: DELL), today released an open letter to the Special
Committee of the Dell Board of Directors and addressed Dell's
preliminary proxy statement.
The full text of the letter is as follows:
April 9, 2013
Special Committee of the Board of Directors
Dell Inc.
One Dell Way
Round Rock, TX 78682
Attention: Alexander Mandl
RE: Dell Inc. Proxy Statement
Dear Members of the Special Committee:
As the beneficial owner of 8.4% of Dell Inc.'s outstanding
shares, we are writing today to express our views regarding the
Company's proxy statement. It is our position that the proxy
statement fails to make a case for shareholders to accept the
$13.65 per share Michael Dell /
Silver Lake buyout offer. In addition, we believe that the
Special Committee conducted a process that resulted in an
inadequate outcome.
According to the proxy statement, Mr. Dell notified the Board of
his intention to take the Company private in August 2012. The
proxy statement clearly shows that, in their review, the Special
Committee and Board of Directors reached conclusions that stand in
stark contrast to views held by the Board prior to August
2012. While the Special Committee may have worked diligently
and was assisted by credible and reliable professionals, even a
good process – without the exercise of proper business judgment –
can result in a bad transaction.
The Proxy Reveals a Robust Process Leading to an
Inadequate Result
Over the last two years, under a Board authorized program, the
Company has repurchased 224,000,000 shares for $3.4 billion at an average price of over
$15.25 per share. The same Board that
was confident with Dell buying its shares for $15.25 is now attempting to convince all
shareholders that Dell's business is in such dire straits that they
should take $13.65 and exit their
investments. We believe the Board's sudden rush to sell is
triggered by one thing: Mr. Dell's desire to buy.
Furthermore, the proxy statement and the analysis performed by
the Special Committee focus disproportionately on the End User
Computing (EUC) business while giving little attention to the
Enterprise Storage and Services (ESS) business.
Southeastern's in-depth analysis indicates that at the completion
of the Company's transformation to ESS, Dell's future
owners should realize valuation multiples significantly higher
than those reflected in the current offer price.
It is not about the PC. It is not about the PC. It is not
about the PC…
Management has repeatedly highlighted the ESS business on
previous earnings calls and provided estimates that show that ESS
will account for 35% of the Company's fiscal 2014 estimated revenue
and 58% of its fiscal 2014 estimated Non-GAAP operating income
(OI). Because the 58% of Dell's 2014 estimated Non-GAAP
OI attributable to ESS is worth a much higher multiple than
the 42% of Company profits tied to the EUC segment, the ESS
business, Dell's cash and Dell Financial Services (DFS) are worth
far more than half of total corporate value (see Table 1).
Table
1: Business Contributions(2)
(B =
Billions of USD)
|
|
Revenues
|
Non-GAAP OI
|
Value
|
|
(FY14E)
|
%
of
|
(FY14E)
|
%
of
|
Range
|
%
of
|
EUC(1)
|
$
|
36B
|
65
|
%
|
$
|
1.5B
|
42
|
%
|
$
|
7-8 B
|
~18
|
%
|
ESS
|
|
19B
|
35
|
%
|
|
2.0B
|
58
|
%
|
$
|
20-25B
|
~55
|
%
|
Net Cash +
DFS
|
--
|
NMF
|
--
|
NMF
|
$
|
11 B
|
~27
|
%
|
(1) Includes the PC business and PC-related
operations of the Support & Deployment and Software &
Peripherals businesses
(2)
Estimates based on numbers from Dell FY14 projections and Wall
Street estimates
|
Yet, in all the analytical work and the voluminous proxy
statement, EUC and PC are referenced hundreds of times more
frequently than ESS. This is a stark contrast to the
Company's prior emphasis on the emerging value of ESS. Given
this change in public positioning, Dell's shareholders should
question why the Board is suddenly focused on EUC, and not on ESS –
which was previously believed to be the future of the business.
In addition, the Board's approach of initially limiting the
potential acquirers to private equity firms that would allow Mr.
Dell to have majority ownership of the Company and remain as CEO
narrowed the potential bidders materially and contributed to the
Board's approval of a transaction at a price that undervalues the
Company.
In fact, within the proxy statement, virtually every
justification of the $13.65 per share
price is based on a premium to market at the time of the
analysis. Such an approach is misleading when it is based on
a price at the low end of the trading range over the last 15
years. Instead, any valuation analyses should have compared
the $13.65 offer price to the net
asset value of the Company. Additionally, the valuation
analysis should have focused on an appropriate multiple of the
Company's free cash flow per share, more than half of which is from
the growing ESS business, plus the net cash on the balance sheet
and the value of DFS.
The Special Committee Gave Limited Consideration to
Shareholder Friendly Alternatives
In our February 8, 2013, letter to
the Board, we stated that we would have been prepared to support a
leveraged recapitalization and suggested it could have been done in
the form of a $12 per share special
dividend, a Dutch auction or another structure that would have
allowed shareholders an opportunity to participate in Dell's
future. Despite the viability of such a transaction, the
proxy statement shows that the Board and Special Committee spent
little time researching a leveraged recapitalization. The
lengthy proxy statement only discusses the "pros" and "cons" of a
leveraged recapitalization on a handful of pages and in only a
cursory manner. The proxy statement also does not provide any
real analysis or give any attention to solutions that would have
either allowed shareholders to receive a large special dividend or
to remain shareholders of a company with a smaller share
base. It appears that neither the Board nor the Special
Committee aggressively pursued the leveraged recapitalization idea
because senior management preferred a go-private transaction.
In addition, as widely reported, management spent over
$13 billion on acquisitions of non-PC
businesses which benefit from the very same cloud and mobility
trends that are negatively impacting the PC business.
Long-term owners such as Southeastern have supported Dell in its
transformation into an enterprise solutions company, but are not
being given the opportunity to participate in the return on that
$13 billion investment.
On January 29, 2013, Southeastern
sought a meeting with the Special Committee in response to market
leaks regarding a reported go-private transaction. In that
meeting, we asked the Special Committee why giving shareholders a
choice, through some form of cash/stock election, would not be
preferable, and in fact fairer, for those shareholders who want to
participate in the Company's upside. Dell's proxy statement
answers that question: quoting from page 38, "Mr. Dell and Silver
Lake were not interested in pursuing a transaction such as the one
proposed by Southeastern in which public stockholders would retain
an interest in the Company."
The Proxy Statement Contains No Justification to Take Dell
Private
The proxy statement does not contain any sound reasoning for
why, at this stage in the transformation, the Company needs to be
taken private. In the entire proxy statement, we found only one
page (page 82) devoted to Mr. Dell's plans for the Company
following the transaction. That single page is consistent with the
Company's prior public statements, and nothing about these plans
requires that the Company be private.
In fact, in an interview with ZDNet two weeks ago, John Swainson, head of Dell's software unit,
essentially confirmed that it doesn't matter whether Dell is public
or private. He said, "the corporate structure of Dell doesn't
make a difference on how customers interact with our products or
how we develop or sell them." We note that many companies,
including IBM, were able to successfully transform their businesses
as public companies. In addition, BCG, an advisor to the Special
Committee stated that "many of the 'take-private' value levers
could (in principle) be applicable to [Dell] as a public
company."
The proxy statement reveals that the Board had become
increasingly frustrated with management's execution of the
transition, and rather than try to solve the problem, it chose to
give Mr. Dell the opportunity to purchase the Company from
shareholders at an inadequate price. Mr. Dell would not be
participating in the proposed go-private transaction if he did not
believe in the Company's future upside and his ability to execute
the transformation of the business.
The Special Committee Has the Power to Act in the Best
Interests of All Dell Shareholders
As we noted above, we believe the proxy statement fails to make
a case for shareholders to accept the $13.65 per share Michael Dell / Silver Lake
buyout. For shareholders trying to decide whether to support
the transaction, the Company's suspension of earnings guidance and
extremely limited discussion of the Company's future plans will
make it difficult to make an informed choice. In the next
draft of the proxy, the Special Committee should provide sufficient
detail about Mr. Dell's future plans so that public shareholders
can properly evaluate their options.
The Special Committee has obtained two preliminary alternative
proposals, both of which we view as superior to the Michael Dell /
Silver Lake buyout. We view these proposals as superior
primarily because each offers shareholders the opportunity to
remain owners of Dell while also offering a higher cash price to
owners who choose to exit their investment.
Southeastern urges the Special Committee to negotiate and
evaluate these alternatives in good faith, and to recognize that
offering shareholders a choice is a win / win outcome for all
parties. We call upon the Special Committee to work hard to
make this possibility a reality.
Sincerely,
O. Mason
Hawkins
G. Staley Cates
Chairman &
CEO
President & CIO
ABOUT SOUTHEASTERN ASSET MANAGEMENT
Southeastern Asset Management, Inc., headquartered in
Memphis, Tenn., is an investment
management firm with $34 billion in
assets under management acting as investment advisor to
institutional investors and the four Longleaf Partners Funds:
Longleaf Partners Fund, Longleaf Partners Small-Cap Fund, Longleaf
Partners Global Fund and Longleaf Partners International Fund, as
well as two Irish domiciled UCITS Funds: Longleaf Partners Global
UCITS Fund and Longleaf Partners US UCITS Fund. Southeastern was
established in 1975, and the first of the Longleaf Partners Funds
was launched in 1987.
SOURCE Southeastern Asset Management, Inc.