Will This Fund Block Dell’s LBO?

dell-logoDell (NASDAQ:DELL) might think going private is its best chance to evolve and find its place in the new tech climate, but that doesn’t mean investors are ready to jump on-board the $24.4 billion buyout plan. Southeastern Asset Management Inc., the company’s largest independent shareholder, thinks the bid undervalues the company, a not unpopular opinion among Dell investors.

According to two separate sources, Southeastern has privately told the company that it is “disturbed” by the $13.64 per share offer, and thinks the price-tag for the world’s third-largest PC maker (by consortium) is worth somewhere more like $20 per share.

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The Memphis, Tennessee-based fund, which owns a 7.5 percent stake in the company, has not commented publicly since the deal was announced on Tuesday, but CEO Mason Hawkins commented in a September 30 filing that the fund believed the company’s shares were worth something in the “low 20s” even if its personal computing business was valued at nothing. The “low 20s” is roughly what Southeastern paid for per share when it took its stake. At $13.65 per share, the fund is looking at a loss of at least $825 million, according to Sanford Bernstein analyst Toni Sacconaghi…

Unfortunately, investors are probably being offered the best deal they’re going to get. The buyout consortium — including Silver Lake Partners, Microsoft (NASDAQ:MSFT), and Michael Dell — are just hoping that shareholders will realize that this is their best option. Without the ability to restructure and evolve, which would be limited if Dell were still beholden to public shareholders, the consortium is of the opinion that the company will never get its footing and continue to slip in the ranks until it’s no longer a key player in the tech space.

Still, Southeastern is not alone in its discontent. Over the past few days, other Dell shareholders have indicated that they will vote against the deal. The question is, will their numbers be enough to prevent the buyout?

The answer to that question could be ‘yes’. In recent weeks, there’s been a huge influx into Dell shares in anticipation of the buyout, and event-driven funds and risk arbitrage investors, now holding an estimated 20 percent of the company, may hold out for a higher offer.

Alpine Capital Research in St. Louis and Schneider Capital Management in Wayne, Pennsylvania, are among other large investors publicly declaring that they will vote against the deal. Alpine holds 2 million Dell shares, Schneider had 350,000 at the end of September.

Dell has agreed to a 45-day “go shop” period in which it will look for an alternative deal, but given how long it took for this deal to come to fruition, it seems unlikely the company will find any better offers. The buyout consortium is hoping that the 45-day shopping period will prove to investors that they’re getting the best deal available, and a regulatory filing expected in mid-March could give them that extra nudge necessary to push through the deal.

That filing details the actions Dell took before arriving at the current deal, according to sources, who say a buyout was by no means the first option Dell explored. In fact, they say the company considered remaining a stand-alone company, separating its PC business, a leveraged recapitalization, or restructuring its assets, among other things. But when the company realized none of those would work, it turned its sites on a buyout, which Michael Dell aggressively pursued until he found partners willing to help him take the company private.

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